Stanford professors Kenneth E. Scott and John B. Taylor in “Why Toxic Assets Are So Hard to Clean Up” (Wall Street Journal, July 21, 2009) wrote about the complexity of mortgage backed securities, and proposed that mandatory transparency is the only solution. But they stopped short of identifying the root cause of the financial meltdown: paper assets. Paper mortgage, commercial, auto and other loans make it impossible to share loan data on all of the assets that underlie MBS. This renders the authors’ proposal of a central database based on the data from current, paper mortgages and the resultant securities impossible.
In today’s world, loans are printed and signed on paper, then scanned into computer systems for storage. The thousands of data points of interest to investors are not rendered accessible to computers. The paper is then stored permanently in a warehouse somewhere far away from Wall Street. As a result, the investor gets little or no data about the borrowers behind each loan in the MBS.
Electronically created loans make it easy to share all available data, no matter how the assets are pooled, securitized, and recombined. It enables investors to make their own decisions about risk and reduces their reliance on ratings agencies, preventing a build-up of impossible to price assets in the future.
I have worked for ten years to advance the cause of 100% paperless, 100% transparent electronic assets. While many of the nation’s largest banks are beginning to implement some form of electronic lending, it is Congress who must set the date for adoption.