The Investigative Process

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Adam Levitin, one of the first people to tell investors how the foreclosure crisis may just point to much larger problems introduced by securitization, has this to say about what we need to do to get out of this mess.

I was glad to hear Ben Bernanke announce this morning that federal regulators would be looking into the faulty foreclosure process.  But how is this inspection going to work?  The only way to actually answer whether we have a systemic faulty foreclosure problem is to have legally trained personnel examine a healthy sample of actual loan files on both the servicer and trustee level.  Is that what the federal bank regulators are going to do?  Do they even have the personnel?   I don’t think bank examiners have the training to know what sort of legal documentation and procedures are required to properly consummate a foreclosure; it’s just not part of what they do.  And are they going to look at the actual loan files or just talk to the servicers and get reassurances?

The credibility of the federal response rests on the investigative process; unless there are sufficiently trained personnel looking at the actual files, we won’t know the real scope of the problem, and any clean bill of health will be a white wash. [my emphasis]

This gets at something I’ve been trying to get to in my continued rants about warranting titles. The legally trained people who would normally review titles on this kind of individualized basis are title insurer employees (I grant that they probably don’t have experience in tracking the trustee data, though my suspicion is that the easily identified problems, like robosigned documents, would be a good initial trigger point for further investigation into the securitization of the loan).

By having the banks warrant these loans, it makes it far less likely that the title insurers will do that kind of review (and remember, Fidelity National by itself looks at almost 40% of the titles that pass hands).

Now maybe there is someone besides the title company prepared to do this work, but I’m not hearing anyone besides Levitin talk about who that might be.

Fannie and Freddie Near a Deal with Title Industry

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As I noted in my last post on the move, led by Fidelity National, to require banks to warrant against “incompetent or erroneous affidavit testimony or documentation,” the move was largely about getting Fannie and Freddie on board and with them making this a standard practice in the industry.

So I’m not surprised by the report that that’s precisely what is happening. But I do find the description of Fannie and Freddie’s role in this process to be noteworthy.

The behind-the-scenes work illustrates how, as banks prepare to resume home repossessions, few entities have a greater interest in helping to put the foreclosure train back on track than Fannie and Freddie, which together own or guarantee half of all U.S. mortgages.

“They’re in a position to pursue good, straight, and solid answers. In that way, they play a quasi-regulatory role,” said Kurt Pfotenhauer, chief executive of the American Land Title Association, a trade group.

[snip]

Still, the foreclosure-document crisis is raising an age-old question that has dogged the mortgage firms: Should they play the role of regulator, or business partner, with the mortgage originators and servicers that are their customers?

On one hand, Fannie and Freddie need to make sure foreclosures are proceeding properly. But on the other hand, they want to move the process along as fast as possible because each day that they can’t repossess homes, they lose more money and ring up a bigger bill for taxpayers.

“Given their public purpose and the special advantages they have in the marketplace, Fannie and Freddie should be a model to the whole industry of how to make sure the foreclosure process is working properly,” said Julia Gordon, a senior policy counsel at the Center for Responsible Lending.

But the firms’ regulator, and the companies themselves, say that the onus is on servicers to fix any problems and vouch for the quality of their foreclosure processes.

Fannie Mae “is not in a position to be the determining body as to whether servicers are putting processes in place that comply with the law,” a company spokeswoman said.

This is basically the government–as the owner and guarantor of Fannie and Freddie–basically saying the banks should just fix their own practices. No wonder that line sounds so similar to what we’re hearing from the Obama Administration.

And couple this disinterested stance toward servicer problems with the news that the government has known, since sometime after May, that there was a,

significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.

Yet it has not done anything about the servicers that it knows (but will not name) which have not followed required practices to try to keep people in their homes.

Note too the reference in the linked article to Fannie’s institution of fines on servicers that didn’t churn through their foreclosures in timely fashion.

The past practice of Fannie and Freddie shows they have every intention of keeping foreclosures churning through the system and government regulators appear to have no intention of slowing that churn. Signing this title insurance agreement is part of that same process.

We, the taxpayers, have become the owners of a system that churns inexorably on to evict us from our homes.

“The Federal Government Is Moving Comprehensively and Quickly”

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Something has been nagging me about this HuffPo description of HUD Secretary Shaun Donovan’s briefing on the foreclosure crisis the other day. It’s the revelation that, in a review started in May, the government had found that foreclosure servicers are not complying with FHA requirements that servicers attempt to modify loans before they foreclose on them.

Donovan said the administration had yet to complete its review, which began in May. Thus far, though, it had found “significant difference in the performance of servicers, and in particular, information that shows us there is not compliance with FHA rules and regulations around loss mitigation.” Donovan said the findings were limited to firms that deal with FHA loans. He declined to single out servicers. Other HUD officials likewise declined, despite repeated requests.

When it came to the larger issue of what some legal experts describe as a fundamentally-flawed and fraud-ridden mortgage market — fraudulently-underwritten loans that passed through a maze of institutions that failed to properly maintain basic paperwork or follow legal procedures in bundling, securitizing and ultimately selling those mortgages to investors — Donovan said that, thus far, all is well.

“The primary issue that’s been the focus of the moratoria is, is the foreclosure process being followed correctly? Are affidavits being filed correctly, and are notarizations and other things being done correctly? That is one set of issues,” he said. “A second set of issues — and we think this is very important — that we look more broadly at, ‘Are servicers taking steps to help keep people in their homes?'”

The lesser, third issue that has been raised, Donovan said, is whether the process underlying the securitization of mortgages is “in question.”

“So that’s the point that I’m trying to make, is that the issues that we are finding … that we’re focused on are, ‘Are there particular servicers that are not following these processes?'”

Donovan added that “we have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed.”

Keeping in mind that this review started five months ago, watch this video of Donovan from Wednesday. In it, Donovan seems intent on declaring the overall system of mortgage finance–including MERS–to be sound, even while he reveals that the review showed some servicers were not making the required effort to modify loans before foreclosing on people.

This is not a systematic issue, according to Donovan, but some servicers that he declines to name (as he did in the briefing HuffPo describes) are not following processes to keep people in their homes. Oh, and “the Federal government is moving comprehensively and quickly to ensure that servicers are complying with the law and that they are taking the actions they’re required to take and they should take to keep people in their homes.”

Well over a million homes have been foreclosed on since the government began its review of the foreclosure process. At some point in that time, the government determined that certain servicers were not complying with federal rules about modifications.

So why are we just hearing about it now after those million families have lost their homes?

I appreciate that the government–by refusing to call this systemic fraud systemic–acquires new leverage over servicers to actually do something about their refusal to modify loans. But why have we heard nary a peep out of the government about this before now? And why is the government refusing to make public which deadbeat banks are breaking the rules on loan modifications?

Fidelity National’s Role in the Cover-Up

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I’ve got a slightly different take than DDay on the news that Fidelity just established a policy requiring lenders to warrant all foreclosure sales going forward.

Fidelity National Financial Inc., the largest U.S. title insurer by market share, will require lenders to sign a warranty assuring their paperwork is sound before backing sales of foreclosed homes.

An indemnity covering “incompetent or erroneous affidavit testimony or documentation” must be signed for all foreclosure sales closing on or after Nov. 1, the Jacksonville, Florida- based company said in a memorandum to employees today. The agreement was prepared in consultation with the American Land Title Association and mortgage finance companies Fannie Mae and Freddie Mac, Fidelity National said.

DDay argues that Fidelity National is basically asking for a guarantee that it won’t have to pay off any claims on title problems.

I’m sure the health insurance market would love a clause that forced the maternity ward to sign a warranty that the baby they birthed into the world will be healthy their entire life, or else they pay up. I do understand the title insurers’ complaint, and I’m glad they’re forcing the issue with the lenders, but I can’t help but find it a little weird. If the banks are paying on the insurance, I’m not sure we need a title insurance industry.

Now, I’m not an expert. I’m just someone who has been considering whether she should still be looking to buy a house in this market. But as I understand title insurance the biggest part of the service they offer–what you’re paying them for–is not risk going forward, but rather a competent and thorough search for any outstanding title problems. Here’s one explanation:

Because title insurance protects against what may have happened in the past, most of the expense incurred by title companies or their agents is in loss reduction. They look to reduce losses by finding and fixing defects before the policy is issued, in much the same way as firms providing elevator or boiler insurance. These types of insurance are very different from life, property or mortgage insurance, which protect against losses from future events over which the insurers have no control.

So I take this move not as an effort to avoid paying any claims. I take it as an admission from Fidelity National that it cannot or will not adequately do that main part of its job: review the documents on a house and make sure the documents say what they appear to say. Instead of doing the forensics required to check that documentation (lawyers challenging foreclosures have proven fraud by showing notary stamps post-date the purported signing of the notarized document, comparing signatures to prove some are forgeries, and pointing to allonges not attached to the actual note, among other things) on every sale, they’re simply demanding that banks claim they don’t need to do that work.

Note, too, that Fidelity National instituted this policy (as distinct from the agreement it signed with Bank of America on the day BoA halted foreclosures) in consultation with Fannie and Freddie. That is, in consultation with government owned entities holding a majority of the mortgages out there.

So the government and Fidelity National have gotten together and said, “rather than actually check for fraud we’ve got abundant evidence exists not just in foreclosures being processed now, but in foreclosures already sold and–significantly–in performing loans that were securitized at the height of the boom, let’s just have the banks sign off on any foreclosures going forward.” As a particularly nice touch, they’re describing this fraud not as fraud, but “incompetent or erroneous affidavit testimony or documentation.”

From the standpoint of an industry and a government hoping to prevent people from learning about the extent to which our property system has been tainted by the banksters, that might be shrewd. After all, the most common time for real people to challenge bank conduct here is when they are foreclosed on or when they buy a house–when they are involved in a legal transaction. We only came to understand the true extent of foreclosure fraud after foreclosure and bankruptcy lawyers had dealt with such volume of cases that they came to learn the tricks of the servicers and even reviewed enough documents to have solid evidence of notary and robosigner fraud. By getting indemnity from the banks, Fidelity National (and our government acting through Fannie and Freddie) will ensure that one entity at least will continue to offer lenders title insurance, helping them unload those properties that may or may not have fraudulent title, but will never look closely at the documentation to see if there has been fraud. Fannie and Freddie just worked with Fidelity National to ensure that 38% (Fidelity National’s market share) of the 25% of all homes that are sold that are foreclosures will never have their title examined closely. 9.5% of homes will be sold without the thorough paperwork review that everyone knows should be done at this point, thereby ensuring not only that the market will continue to move, but also that banks always have a way to sell a house without the title insurer doing its job, but instead relying only on the bank’s say-so for the most likely title problem.

But the thing is, they may well get away with it (or, at the very least, minimize bank losses). Read more →

Obama Admin: Look Forward! Even in the Face of Obvious Corporate Fraud!

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I’m not surprised by this–but I simply don’t understand how the Obama Administration can claim they haven’t found anything fundamentally flawed (though that could be HuffPo’s formulation) when thousands of people have been thrown out of their homes based on documents whose signers falsely attested to those documents.

U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday that the Obama administration will attempt to protect homeowners and police the kind of paperwork fraud that led the nation’s largest banks to temporarily halt foreclosures this month, but added that the administration had yet to find anything fundamentally flawed in how large banks securitized home loans or how they foreclosed on them.

“Where any homeowner has been defrauded or denied the basic protections or rights they have under law, we will take actions to make sure the banks make them whole, and their rights will be protected and defended,” Donovan said at a Washington press briefing. “First and foremost, we are committed to accountability, so that everyone in the mortgage process — banks, mortgage servicers and other institutions — is following the law. If they have not followed the law, it’s our responsibility to make sure they’re held accountable.”

He added, however, that the administration is focused on ensuring future compliance, rather than on looking back to make sure homeowners and investors weren’t harmed during the reckless boom years. The administration is “committed to forcing institutions to change the way that they conduct business,” Obama’s top housing official said, “to make sure these problems don’t happen again.”

When people were suckered into inflated mortgages, it wasn’t good enough for them to “make sure [those] problems don’t happen again.” They lost their homes, their credit ratings, and their savings.

But I guess that’s their own fault for being a mere human rather than a corporate person.

Administration Inches Closer to Rule of Law on Foreclosure Crisis

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…with this statement from Robert Gibbs:

As institutions are determining their next steps in addressing these issues, we remain committed to holding accountable any bank that has violated the law. In addition to strongly supporting the investigation by the state attorneys general, the administration’s Federal Housing Administration and Financial Fraud Enforcement Task Force have [sic] undertaken their own regulatory and enforcement investigation into the foreclosure process.

This is stronger than the repeated statements from HUD Secretary Shaun Donovan.

Let’s hope the Administration includes individual banksters in that statement.

Foreclosure Mill King David Stern Announces Big Management Changes

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David Stern’s company, the foreclosure mill that has removed thousands of Floridans from their homes, announced big management changes today. Otherwise known as abandoning ship:

DJSP Enterprises, Inc. (Nasdaq:DJSP) (Nasdaq:DJSPW) (Nasdaq:DJSPU) today announced that Stephen J. Bernstein, the Company’s Lead Independent Director, has been appointed as Interim Chairman of the Board of the Company. Initially, Mr. Bernstein’s role as non-executive Chairman will be a full time position as he provides Board support to the Company as it develops and executes plans to respond to recent developments impacting the Company and the industry. Mr. Bernstein replaces Mr. David J. Stern as Chairman of the Board. Mr. Stern continues in his role as Chief Executive Officer of the Company and will serve as its President.

The Company also announced the voluntary resignations of Richard Powers, as President and Chief Operating Officer, Kumar Gursahaney as Executive Vice President and Chief Financial Officer and Howard S. Burnston, as Vice President, General Counsel and Secretary, each of whom joined the Company in 2010. [my emphasis]

The only question is whether these guys were fired for being insufficiently loyal, or whether they’re trying to get out just before the sheriff arrives.

What Did David Stern Do with the Truck of Documents He Removed from His Office?

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4ClosureFraud published another of the depositions from the FL investigation into foreclosure mill David Stern’s office. In it, Kelly Scott, the assistant of Cheryl Salmons–the woman who oversaw the robosigner aspect of their business–included details on how Salmons appears to have created her own lost title affidavits, how they would backdate affidavits of proof of service for foreclosures when the borrower hadn’t been served properly, and reclassify files to hide them from Freddie Mac when auditors would come for a visit.

But one of tidbits that seemed to surprise the lawyers had to do with Stern moving a truck load of documents offsite to another office.

Q. Did they say anything about what’s going on with Stern or Cheryl Salmons or anybody else?

A. The only concern was that they were moving files out of the office into a different office and that Eighteen Inch Freight, I think, was picking them up. Something like that. Trailer freight, something like that.

Q. Do you know where —

MS. CLARKSON: Eighteen wheeler?

THE WITNESS: Yeah, eighteen wheeler.

BY MS. EDWARDS: Q. Do you know where they were moving them?

A. Supposedly they were being moved to Orlando’s office.

Q. And do you know why they would do that?

A. No.

Q. Do you know how long ago this was going on?

A. I think a month and a half ago.

Q. What kind of office is Orlando?

A. David Stern has another law office in Orlando, Florida.

Q. What office is that?

A. I don’t know.

Q. And was it connected with the office here in Broward County?

A. Yes.

Q. And do you know which — what the office is there or what the location is?

A. No, I just know it’s another law office for David Stern that he’s opened for foreclosures in Orlando.

Q. And did he just open it a month and a half ago?

A. No. He opened it, I think it was either sometime at the beginning of this year or the end of last year. I can’t remember.

Q. 2010?

A. Yeah.

Q. Or December 2009?

A. It could be around that time. I just can’t remember.

Q. Well do you know if these files were being moved out over concern of the investigation?

A. Oh, I don’t know.

Q. Or just because they were moving files?

A. They were just moving a particular bunch of files to that office to be reviewed. That’s what — You know, my friend expressed that they were going to be reviewing them over there.

Mind you, this is hearsay, something Scott relayed that one of her friends still at the firm told her. And she has no reason to believe this is a response to the ongoing investigation into the case. (This deposition was taken on October 4, so the description of Stern moving files a month and a half ago would put it in roughly August.)

But this is the problem with the current treatment of all this fraud as mere “mistakes.” Because it leaves the chain of custody of such documents in the hands of the perpetrators to treat just as Enron did.

HUD Secretary Donovan: Banks Should Fix Problems Caused by their Law Breaking

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Check out the following passage in HUD Secretary Shaun Donovan’s statement opposing a moratorium on foreclosures:

No one should lose their home as a result of a bank mistake. No one. That is why the Obama Administration has a comprehensive review of the situation underway and will respond with the full force of the law where problems are found. The Financial Fraud Enforcement Task Force that President Obama established last November has made this issue priority number one. Bringing together more than 20 federal agencies, 94 US Attorney’s Offices and dozens of state and local partners to form the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud, the Task Force is examining this issue and the Attorney General has said publicly that if it finds any wrongdoing the members of the task force will take the appropriate action. The Federal Housing Administration and Federal Housing Finance Agency have launched reviews to make sure servicers are in full compliance with the law. The Office of the Comptroller of the Currency has directed seven of the nation’s largest servicers to review their foreclosure processes, fix the processing problems and determine whether there is specific harm that has been caused in individual cases.

The message all these institutions are sending is the same: banks must follow the law — and those that haven’t should immediately fix what is wrong. [my emphasis]

Donovan offers a list of government agencies which have regulatory and legal authority to penalize the banks, but ultimately says that the banks themselves will be directed to police themselves.

The message these regulatory and law enforcement agencies are sending, Donovan says, is that the banks that haven’t followed the law should immediately fix what is wrong. Not, “the banks that haven’t followed the law should be prosecuted.” But “the banks that haven’t followed the law should make it right on their own.”

And while Donovan brags that the Financial Fraud Enforcement Task Force has been on the job for almost a year, it has done nothing about the multiple bank employees who have given sworn dispositions admitting to committing fraud on courts.

But that’s not all that surprising. After all, Donovan is also propagating the myth that this systemic fraud is just bank “mistakes.”

The rest of Donovan’s statement is no better. It tries to personalize the harm that hypothetically would result from a moratorium. But the examples make no sense and all basically assume that banks owning properties lead to declining property values; if that’s the case, then let’s crack down on deadbeat bank landlords. And it certainly misunderstands how a generalized problem with titles–the Administration’s refusal to address the underlying problem–will affect the housing market a lot more than a delay to address to address that underlying problem.

It all appears to be further indication that the Administration hopes that by letting the banks fix this themselves, the problems caused and covered up by the banks’ crimes will just go away.

How Much More Foreclosure Fraud Is Under Seal?

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The NYT has a fascinating story about the $75,000 house that led to the GMAC deposition on robosigning that finally alerted the world to the extent of the fraud behind foreclosures. It’s worth reading for the description of Thomas Cox, a lawyer who volunteers at legal assistance to make right for his years of doing foreclosures, the description of the errors GMAC made even after the court started looking closely, and the detail that GMAC has now spent more on legal fees trying to foreclose on this house than the house itself is worth.

But I’m particularly interested in this:

Mr. Cox vowed to a colleague that he would expose GMAC’s process and its limited signing officer, Jeffrey Stephan. A lawyer in another foreclosure case had already deposed Mr. Stephan, but Mr. Cox wanted to take the questioning much further. In June, he got his chance. A few weeks later, he spelled out in a court filing what he had learned from the robo-signer:

“When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn’t. When he says that he has custody and control of the loan documents, he doesn’t. When he says that he is attaching ‘a true and accurate’ copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn’t.”

GMAC’s reaction to the deposition was to hire two new law firms, including Mr. Aromando’s firm, among the most prominent in the state. They argued that what Mrs. Bradbury and her lawyers were doing was simply a “dodge”: she had not paid her mortgage and should be evicted.

They also said that Mr. Cox, despite working pro bono, had taken the deposition “to prejudice and influence the public” against GMAC for his own commercial benefit. They asked that the transcript be deleted from any blog that had posted it and that it be put under court seal. [my emphasis]

GMAC’s first response to this affidavit was a request to the judge to prevent it from being posted to the Toobz (presumably 4closureFraud.org). But the judge refused.

Stephan’s deposition was taken to advance a legitimate purpose, and the testimony elicited has direct probative value to this dispute. Attorney Cox did not himself take action other than to share the deposition with an attorney in Florida. That the testimony reveals corporate practices that GMAC finds embarrassing is not enough to justify issuance of a protective order. Further, Plaintiff has failed to establish that GMAC has been harmed specifically as a result of the dissemination of the June 7, 2010 deposition transcript, given that similarly embarrassing deposition testimony from Stephan’s December 10, 2009 Florida deposition also appears on the Internet, and will remain even were this Court to grant Plaintiff’s motion. Accordingly, because Plaintiff has failed to satisfy its burden of persuasion under Rule 26(c), its Motion for Entry of Protective Order is denied.

There are, we are learning, depositions all over the country showing that servicer employees committed outright fraud. But presumably, every time they’re taken, the servicer attempts to hide them behind claims of trade secrets.

How much more evidence of corporate law-breaking is hiding in foreclosure courts under seal?