More Attorneys General are waking up to the foreclosure fraud nightmare, and acting in the interests of their constituents. Martha Coakley, the Massachusetts Attorney General also known as history’s greatest monster, showed why she would have actually been a pretty decent Senator by calling for a statewide moratorium in the Bay State.

“Our office has been extremely active in holding major banks and Wall Street firms accountable during this foreclosure crisis. We are concerned about the revelations that Bank of America and other major lenders have failed to properly review foreclosure documentation,” Coakley said yesterday in a statement. “Our office is now investigating this apparent failure of major creditors to follow state foreclosure law to ensure that Massachusetts homeowners are properly protected. In light of these revelations, we are asking Bank of America and other major creditors to cease foreclosure proceedings for Massachusetts homeowners until they can demonstrate that they have complied with Massachusetts law.”

Massachusetts is one of the states where judicial sign-off is not required for foreclosures, so it’s significant that Coakley still wants a moratorium. But it’s impossible to ignore the reality of the fraud; as one lawyer says in the story, “We have had thousands, maybe hundreds of thousands of foreclosures around the country by entities that did not have the right to foreclose.”

Executive Vice President of the AFL-CIO Arlene Holt Baker wants a national moratorium, and the banks would actually do well to heed that call. By mucking up the paperwork and confusing the ownership of perhaps millions of homes, the lenders have created what has come to be known as blighted titles.

U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership.

“Defective documentation has created millions of blighted titles that will plague the nation for the next decade,” said Richard Kessler, an attorney in Sarasota, Florida, who conducted a study that found errors in about three-fourths of court filings related to home repossessions [...]

Such mistakes may allow former owners to challenge the repossession of homes long after the properties are resold, according to Kessler. Ownership questions may not arise until a home is under contract and the potential purchaser applies for title insurance or even decades later as one deed researcher catches errors overlooked by another. A so-called defective title means the person who paid for and moved into a house may not be the legal owner.

“It’s a nightmare scenario,” said John Vogel, a professor at the Tuck School of Business at Dartmouth College in Hanover, New Hampshire. “There are lots of land mines related to title issues that may come to light long after we think we’ve solved the housing problem.”

The New York Times put it best in an editorial today – the same disregard for rules and standards of documentation on the way up the housing bubble is becoming apparent with respect to foreclosures on the way down. And it’s “yet another reminder that it is folly to rely on banks that got us into this mess to get us out.”

This could absolutely destroy states with a high number of foreclosures like Florida. And the NYT is also right to trace this back to the failure of HAMP. It’s in the best interest of homeowners and banks, now even more so, to modify loans and keep people in their homes. But instead of a program that forces lenders and borrowers to work out an affordable solution, HAMP created a confusing, voluntary process entirely at the discretion of the lenders.

The government now has an obligation to step in and get realistic modifications done, if only avoid this foreclosure fraud nightmare that could resonate for decades with properties where the title holder is virtually unknown. There’s even a credible model for what the government could do, which I’ll tackle in a later post.