The Associated Press has a juicy story on the rise and fall of Florida’s foreclosure mill kingpin David Stern (hat tip Lisa Epstein). It combines sordid detail with an account of how his business as a business went wildly off the rails.
For those new to this blog, the Law Offices of David Stern was the biggest foreclosure mill in Florida, one of the first to be targeted by a state attorney general, and per both reports on the ground as well as revelations from official and media investigations, one of the worst abusers of court procedures and borrower rights.
Aside from depicting how utterly out of control Stern was as a businessman, the AP story helps explain how the mortgage business got to be such a horrorshow. Moe Tkacik, a financial writer who has poked around the dark corners of the securitization and muni finance businesses, and I chatted a couple of nights ago about the foreclosure crisis. One of the questions that was nagging at her was who came up with the idea of robosigning?
The article suggests that it was the foreclosure mills in response to servicer pressure on fees. And notice the stance of the writer in this extract. Most MSM accounts so far have bent over backwards not to be too critical of banks. By contrast, this article depicts servicers as partners with Stern in what Bill Black would call a criminogenic environment (boldface ours):
The rise and fall of Stern, now 50, provides an inside look at how the foreclosure industry worked in the last decade — and how it fell apart. It also shows how banks, together with their law firms, built a quick-and-dirty foreclosure machine that was designed to take as many houses as fast as possible…
Florida authorities characterize the foreclosure process at these law firms as a “virtual morass” of “fake documents” and depicted Stern’s operations as something akin to the TV show “Lost” — only instead of people that went missing, it was paperwork. Stern’s employees churned out bogus mortgage assignments, faked signatures, falsified notarizations and foreclosed on people without verifying their identities, the amounts they owed or who owned their loans, according to employee testimony. The attorney general is also looking at whether Stern paid kickbacks to big banks.…
The foreclosure business is a volume game. Banks typically pay law firms like Stern’s about $1,400 for each successful foreclosure. But the banks can pay a lot less if the firm doesn’t successfully foreclose within a certain time frame, usually around six months….
Like so many in the industry, Stern had a strategy to cope with all the volume and velocity: robo-signing. One employee testified that Stern’s chief lieutenant, a one-time file clerk named Cheryl Samons who rose to become the firm’s chief operating officer, signed as many as 1,000 foreclosure affidavits a day without reading a single word. The employee said Samons’ hand got so tired that she told three other employees to forge her signature. Samons also signed numerous mortgage assignments with a notary stamp that didn’t even exist at the time of signing. Notary stamps are only valid for four years. The only way Samons could have signed mortgage assignments at the time they were supposedly notarized was if she had been capable of time travel…
Stern battled to keep the chaos inside his firm a secret. In 2008 and 2009, whenever the Fannie Mae auditors were about to touch down in Miami for their routine monitoring, Stern’s employees sometimes toiled through the night, ripping the stickers and client codes off of Fannie files and replacing them with those of a different lender. Then, as an extra precaution, they hauled the disguised files to a remote back room.
Stern then gave Fannie officials the white-glove treatment, with catered meals and chauffeuring. The incomplete files stayed hidden until the auditors left town.
I’ve omitted a lot of prurient detail (Stern allegedly didn’t merely grope employees but even fake humped them) but the business-related part of the account is plenty ugly. Nevertheless, Moe’s question is only partially answered. How did robosigning become so widespread across so many law firms spread across the country? This suggests there must have been a propagation channel for this “innovation”. Did servicers go so far as to say, “We use XYZ firm in Florida, they sign affidavits on a factory basis. That enables them to meet the fees we are willing to pay. It’s up to you to make your economics meet prevailing standards.”
Tom Adams, a mortgage securitization expert, has suggested that the significance of miscreant servicer Fairbanks has not been recognized. Law professor Kurt Eggert provides a good overview in his 2007 article, “Limiting Abuse and Opportunism by Mortgage Servicers.” In 2003, Fairbanks had become the biggest subprime servicer in the US by acquiring other subprime servicers. Some of the servicers it had bought were affiliated with originators that had overstated property values and engaged in lax underwriting. That meant a lot of the loans were due to go bad. Fairbanks came under pressure, via litigation, downgrades in servicer ratings, FTC and HUD investigations, due to widespread evidence of serious servicing abuses. Notice Fairbank’s argument, per Eggert:
In response to the lawsuits and media reports, Fairbanks argued that it was being blamed for the problems inherent in the portfolios that it had acquired, such as Conti’s. Such portfolios, Fairbanks claimed, presented special problems because they had not previously been serviced properly and because subprime borrowers present special challenges, such as their precarious financial condition and the lack of escrow accounts for taxes and insurance in these mortgages (Collins 2003a). Furthermore, Fairbanks argued that because many of the loans it acquired were already delinquent, it would naturally receive a greater number of complaints (Mitchell 2003). In May 2003, according to an executive at Fairbanks, about 30 percent of its 600,000 home loans were more than two payments behind, and 45,000 of its loans were in foreclosure.
Why is this significant? Adams argues that everyone is missing the causality. Servicing agreements simply do not pay enough for the servicer to handle a high level of delinquent loans (Adam Levitin has also made the similar observations). When they wind up with a high enough level of delinquencies, the only way they can find out of their fee mess is to cut corners to such a degree that it railroads consumers, or engage in other types of abuses to increase fees (we’ve commented repeatedly on how servicers charge junk fees and engage in fee pyramiding that is in violation of their contracts and Federal law, yet goes unchallenged. And these fees are often so large that they can quickly add up to thousands of dollars, well beyond what even a responsible borrower can pay.
So overly low fees and immutable contracts, perversely, are the breeding ground of criminal behavior. Yet the officialdom is still remarkably loath to acknowledge the level of abuse at servicers. The tone of the AP article suggests that it is becoming harder and harder for them to maintain that fiction.
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How did robosigning become so widespread across so many law firms spread across the country? This suggests there must have been a propagation channel for this “innovation”. Did servicers go so far as to say, “We use XYZ firm in Florida, they sign affidavits on a factory basis. That enables them to meet the fees we are willing to pay. It’s up to you to make your economics meet prevailing standards.”….
In 2003, Fairbanks had become the biggest subprime servicer in the US by acquiring other subprime servicers. Some of the servicers it had bought were affiliated with originators that had overstated property values and engaged in lax underwriting. That meant a lot of the loans were due to go bad. Fairbanks came under pressure, via litigation, downgrades in servicer ratings, FTC and HUD investigations, due to widespread evidence of serious servicing abuses.
We can see the servicers’ proximate interest in robo-signing. But as the second part of the quote demonstrates, it was predictable that the bubble would burst and massive numbers of loans would go bad.
It was so predictable, it’s hard to believe it wasn’t predicted, and part of the plan from the start. It’s hard to see how the vast majority of mortgages (and not just subprimes ones) going back to the late 90s weren’t fraudulently induced.
So that puts robosigning in a broader perspective. They expected huge numbers of loans to go bad once the bubble burst. They had fraudulently sold these MBS based on those time bomb loans. They systematically failed to convey the notes as per PSA and REMIC requirements. (This is because they were misrepresenting the quality of the loans in the securities, because they wanted to maintain the ability to assign loans to tranches as they went bad, and probably also because they were selling the same loan multiple times. And also to evade recording fees and taxes.)
So given the fact that they knew the time would come when they’d be engaging in large numbers of foreclosures with insufficient documentation (since they couldn’t go into court with anyone but the trustee holding the properly conveyed note, otherwise they’d be admitting the MBS were fraudulent), the answer was to use lost-note affidavits which would vaguely vouch that the note had been properly conveyed. Hopefully that would be enough.
And since they’d have to produce such massive numbers of these fraudulent affidavits, robo-signing followed as the obvious practice.
I’m still trying to figure all this out, but that’s basically the way it looks to me.
Even though everybody KNEW that there was a near-zero chance of borrowers making the agreed-upon payments, I’m not sure that those who agreed to service those mortgages anticipated the level of foreclosures. But like the borrowers, they anticipated that this “30 year” mortgage would last for no more than 2 years before the borrower refinanced. But like so many things that worked until it stopped working, and when it stopped, it stopped with a vengence. Because with no real brakes on the system, everything just ran into a concrete wall.
They knew it was a bubble which would burst (in addition to its inherent unsustainability, their own assaults on the real economy guaranteed people wouldn’t be able to keep paying and buying), and that at least all the subprime loans would go bust, and probably many more. That’s a lot of foreclosures they must’ve anticipated.
Harvard, Yale, Columbia and other East Coast Blue Blood Universities teach and preach —– the SEE SAW YAW OF THE LAW
BY Dwight Baker
February 7, 2011
Dbaker007@stx.rr.com \
http://www.nakedcapitalism.com/2011/02/florida-foreclosure-mill-king-david-stern-shows-crime-sure-did-pay.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
MY TAKE
Truth once thought to be the same as Justice took a dump long ago. Maybe some places around the globe there is Justice but certainly NOT IN AMERICA. For the schools of higher education teach those most privileged how to game then con the system for personal profit.
Now, the truth is out how David Stern gamed then conned the system, as he obliged the big banks in their squirrelly deals to push along their needs to exit.
But what NOW —- SO WHAT I say! Another fine example before us of the sad state that we are all in —- for none of us has the most minuscule form of Justice. For 90 % our lawyers practice the art of the SEE SAW YAW OF THE LAW.
At the time of the Obama inauguration our Justice department was castrated! No Balls to the walls investigations any longer for now there were No more Balls, Bobby Kennedy tried to bring some down and he received the fatal bullets. So those in DC know how to walk the line, stay in line and behave as told too.
So what will happen with all these things revealed? Probably end up in a Washington Senate Internal Investigation that will give rise to a quick demise of all the hardcore evidence. For again most of our elected officials to spend our money wisely are crooked ass Lawyers schooled in the art of practicing the SEE SAW YAW OF THE LAW.
NOW what say you?
In 2003, the machine was just getting perfected. Aside from a very small number of lenders – Conseco Financial comes to mind – very few foreclosures ended up as repos, so losses weren’t a big factor in the business. Instead, the foreclosure bailout/rescue industry was making money on the spread between jacked up redemption prices, which essentially converted the ubiquitous prepayment penalties into forsclosure fees and add ons to the redemption price, and the jacked up appraised price for the new buyer. I attended a continuing legal ed where a FC attorney said as much, saying “let the loan go to sale where the PrePay no longer applies.” Your client will be better off.”
Many states began regulating foreclosure bailout/rescue deals, and when these laws began taking effect – here August 1995 – this market disappeared, and the repos did become a significant factor.
This aspect never really ocurred to me, but the prepay penalty and the foreclosure servicing charges were about the same magnitude (the servicing charges might have been a little less, thus that attorney’s comment, but they were still a few thousand dollars), and represented a pretty good income stream until nobody was paying them anymore.
Volume transactional business always gets takers, even when the numbers don’t work. The takers can always find a way to make them work, at least temporarily.
Historically, this is a major reason why insurance is regulated – the tendency is to charge too little when there are no claims, and then be broke when the claims come in. This highlights a key problem reconciling competitive pricing on long term liability with the IBG YBG tendency of volume paper businesses.
In the vast majority of cases white collar crime always pays. Even after a prison sentence and a hefty fine, the criminal is always left with a substantial portion of the fruits of the crime (big bucks). Now, at the mob level we have criminal laws that strip the mobster of the fruits of their crime, provided the state can find the fruits. Time to apply the same law to the white collar criminals and a similar civil claw back as that found in the federal RICO statute. We can start by redefining fraud and other white collar crime to make it easier to prove. Next, we apply the same to set of laws to Corporate types in what in now known as “control fraud”. Let us have personal responsibility at this level as well. (not holding my breath)
I have been reading “Naked Capitalism” and other sources, searching for an explanation for the failure of common sense.
The best “unified field” theory describing such failure is presented by William Black.
http://neweconomicperspectives.blogspot.com/
My reading of Black, and others, provides a straight forward explanation.
1) Fraud pays better than honest.
2) Fraud occurred.
3) Fraud will spread in an endemic fashion. Fraudulent transactions grow to replace honest transactions.
4) Fraud must be stopped or else fraud will continue.
At each step of the complicated sequence, fraud is the explanation for the failure of honesty.
The cure for fraud is prosecution.
That’s the best that I can figure.
And with computerized networks, there is plenty of anonymity and new means for people to commit white collar crime.
But all of this requires that the environment become ‘criminogenic’.
Sterns is a chilling example.
Minor but important point of correction: Kurt Eggert’s article was published in 2004, not 2007.
Is there any update anywhere on the action the Obama administration is taking to prosecute these Foreclosure Fraudsters?
@schofeild: The Obama administration is NOT planning to do anything about the fraudsters. We must look forward, not back, don’t you know, so that these mistakes are never made again. Also, if he prosecutes the banksters it will make them sad.
1995 should have been 2005
Stern can’t be the only hood on Fannie Mae’s go-to debt collectors list. Other firms have not only engaged in felonies, but have either equalled or surpassed Stern’s outrageous behavior, and flourish simply for a lack of press coverage. To hell with that – it’s time for automatic disbarment, is this country a kleptocratic banana republic or what? It’s time for massive civil disobedience.
Fannie’s retained attorney list:
https://www.efanniemae.com/sf/technology/servinvreport/amn/pdf/retainedattorneylist.pdf
I’ll start you off. Florida retained attorney Shapiro & Fishman just complained to the court that they don’t want to have to swear to the validity of affidavits filed in Florida foreclosures:
http://floridaforeclosurefraud.com/2010/03/foreclosure-lawsuits-are-built-on-lies-shapiro-fishman-admits-foreclosure-claims-cannot-be-verified/
Fractional reserve lending in a government enforced monopoly money supply is theft of purchasing power via temporary money (credit) creation. Period. Some claim it is also fraud but that is a relic of the gold standard, imo.
Meanwhile, many assume that we can have an honest economy based on that dishonest foundation.
My question: When?
Is this article really trying to pin the blame for robosigning on David J. Stern? Are we forgetting about the 2004 DocX price list, and the fact that robosigners were working at LPS until 2010, when a federal investigation induced them to farm out the robosigning to the foreclosure mills, as described by Scott J. Paltrow? http://www.reuters.com/article/idUSTRE6B547N20101206
I commented months ago that the way to the heart of the scam is to turn foreclosure mill attorneys against LPS. LPS software manages servicer operations, directs the foreclosure mills, and fabricates documents for the foreclosure mills. I really think this article is meant to divert attention away from LPS onto the already-disgraced DJS.
First, robosigning is not the same a document fabrication, although they are related phenomena.
Second, you overstate what I said about the article. Please reread the paragrpah in question.
Yves,
You write: “So overly low fees and immutable contracts, perversely, are the breeding ground of criminal behavior.” I think the entire housing bubble was criminogenic, starting at least with the creation of MERS. The intentional destruction, or failure to create and record, documents in a timely fashion was part of the scheme. They wrote the PSAs, knowing there’d be millions of defaults and foreclosures. Robosigners would be required to sign the requisite fabricated documents. MERS took that into account in its plan. Much of the robosigning was done at LPS until the fee-sharing lawsuit, and the public release of the DocX price list. According to Scott J. Paltrow in his December Reuters article: “beginning early in 2010, county recorders’ records show, signing shifted also to law firms under contract with LPS.” It was LPS’ red-yellow-green pressure on the foreclosure mills, not the servicers’.
I certainly don’t know the deep history, but based solely on this AP article, I wouldn’t assume that DJS or other foreclosure mills initiated robosigning. MERS‘ plan called for lender employees to do the robosigning, to keep the assignments ‘in house’, thus justifying the ruse of recording mortgages in MERS’ name. Foreclosure mill employees were never supposed to perform that function, within the MERS rationale. But then neither were LPS employees.
The same banks who were selling phony MBS securities surely must have known that their servicing arms would have to ‘earn’ their keep via bogus fees. They expected lots of defaults. This was already happening in 2003, according to Kurt Eggert. The mortgages were designed to strip the borrowers’ equity, and the empty MBS and bogus fees were the means towards stripping investors and pension funds.* Why else sell the same loan multiple times? Try to explain how one mortgage payment to one servicer winds up being remitted to several MBS each month. No wonder the PSAs made it impossible for servicers to ask investors’ permission to modify loans.
We know that banks have been using perverse fees to bilk credit card holders. Why wouldn’t servicers intend to do the same, regardless of the PSAs fixed fees? And if the intent of the masterminds was to collect CDS upon massive defaults, why not construct PSAs that would incentivize servicer-induced defaults? I just assume that the PSAs were written the way they were as part of the overall scheme. Making it impossible to modify loans makes as much sense as setting up servicers understaffed and with software that only drives toward default and foreclosure, like a ratchet, with no way to adjust to individual circumstances of each borrower. Yet that’s what they did, which to me implies that they did it on purpose. But then I’ve become extremely cynical. I have no professional background in any of this, so I’m not assuming or expecting anything other than what I’ve read. Perhaps the professionals are too deep in the weeds to perceive the possibility that this was by design?
I know you write about servicer abuse in the hopes that the AGs or Fed or other regulator will do something about this. I was pushing this in comments at other blogs last fall too. So I don’t mean to harm this effort.
My impression now is that Treasury is temporarily creating the illusion of a recovery by propping up the economy with bailouts and statistics, while exhorting and enabling the banks to use whatever predatory, parasitic tricks and bogus fees they can devise to ‘earn‘ their way back to ‘solvency’ on the backs of their customers. It seems to be administration policy to look the other way while the banks force as many foreclosures as possible, in order to be paid by GSEs at par for each foreclosure, whether the family was able to pay or not. Since there’s no way to do this legally, robosigning is a feature, not a bug. Florida is the model of a compliant judiciary for carrying out this scheme.
* It is my belief that the certain knowledge that peak oil spells the end of capitalism, debt creation, and debt repayment provided the impetus to not only prop up the hollowed-out US economy with the housing bubble, but also to ‘cash out’ of the US economy. Dmitry Orlov described it this way in his Nation video released last week: “So what we saw in the Soviet Union was a political dysfunction where basically the communist regime was so endemically corrupt and so out to steal as much as they could at the very end that they really didn’t even bother paying attention to whether they kept the system going, the system was basically on autopilot until it crashed. Something similar is happening here where we have people in all branches of government, both political parties, really trying to prop up the financial industry which has really become completely irrelevant to most people in the United States who don’t have savings and are not credit worthy. They’re basically trying to use up people’s savings and use up people’s retirement to prop up this set of institutions that only help the very rich people.” http://www.thenation.com/video/157985/dmitry-orlov-peak-oil-lessons-soviet-union
MERS didn’t write the PSAs, in fact it has nothing to do with origination, no seat at the table. The standard form PSAs were developed long before the industry went off the rails, so you can’t tie the deal design (which was very carefully crafted) with the bad practices that developed over a decade later.
In fact, as a crime, it would have been far more successful if they had changed the PSAs to conform with the new practices they started to implement sometime between 2002 and 2004, namely, not transferring the notes to the securitization trust as specified in the PSA. Robosigning is penny-ante and asking for trouble.
I’m fully aware that MERS didn’t originate mortgages or write the PSAs. But MERS was intentionally created (carefully crafted?) as a black box to hide what they intended to do with the mortgages & notes.
L. Randall Wray wrote that MERS’ 1999 State-by-State Recommended Foreclosure Procedures Manual directs servicers to retain the notes.* They had to use the same boilerplate PSAs from the past or people would have been alerted ahead of time that something was different this time.
“The deals were carefully crafted.” Are you saying they carefully crafted the deals but didn’t bother to adjust the PSAs? Maybe this was intentional. If the MERS manual is to be taken seriously then what you sate: “the bad practices that developed over a decade later.” is incorrect. Those bad practices were crafted as well, as far as the MERS manual indicates.
* Anatomy of Mortgage Fraud: MERS’s Smoking Gun, Part I
http://www.huffingtonpost.com/l-randall-wray/merss-smoking-gun-part-1-_b_794713.html?view=print
It seems clear that a much greater portion of the fraudulent activity was in NOT following the PSA agreements, rather than anything that was actually in them.
Failed NY Fed Regulator Takes Job With AIG
AIG hired Federal Reserve Bank of New York veteran Brian Peters to help manage risk after the bailed-out insurer paid down a credit line with the regulator.
Peters is joining as a senior managing director in the enterprise risk management group, according to a Jan. 18 memo to staff from Sid Sankaran, chief risk officer. The insurer was rescued by the Fed in 2008 and repaid the last $21 billion it owed the regulator on Jan. 14. Peters was senior vice president in risk management at the New York Fed, where he helped oversee the 12 “largest and most systemically important financial institutions and industry utilities,” according to the memo.
http://www.bloomberg.com/news/2011-02-04/aig-hires-new-york-fed-s-brian-peters-to-risk-management-after-paying-loan.html
“Peters’ risk management talents contributed to the meltdown of Wall Street, rampant fraud, and the TARP bailouts. Based upon that track record, Peters is our man.” said an AIG spokesperson.
What”s wrong with this statement below…
“Stern battled to keep the chaos inside his firm a secret. In 2008 and 2009, whenever the Fannie Mae auditors were about to touch down in Miami for their routine monitoring, Stern’s employees sometimes toiled through the night, ripping the stickers and client codes off of Fannie files and replacing them with those of a different lender. Then, as an extra precaution, they hauled the disguised files to a remote back room.
Stern then gave Fannie officials the white-glove treatment, with catered meals and chauffeuring. The incomplete files stayed hidden until the auditors left town.”
What’s wrong, they all including Stern were on the taxpayers dime… no doubt Stern, Fannie Mae “attorney of the year” was able to bill back his largess showdered on Fannie Mae auditors, while lining a few pockets, with a good ole wink, wink, nod, nod!
Indite the auditors on the taxpayers salary! Short, sweet and simple!
“Yet the officialdom is still remarkably loath to acknowledge the level of abuse at servicers.”
You mean “predictably loath” I presume. Officialdumb has a lot to answer for in this unbelievable mess, and it is the very last thing they want to do. So, extend and pretend, obfuscate, spin and more spin is the game plan of Geithner & Compadres.
As for Obama, he has an “agenda” to fulfill, and mere distractions like the economy (most especially job creation) just cannot be allowed to be an impediment toward his goal.