Collateral damage – more than Paul Jackson’s reputation at risk

Events during this financial crisis have repeatedly displayed a degree of disrespect for various pundits’ authority; every so often another pulpit is toppled. So spare a thought for the pundits, the most unmourned of crisis casualties. One skips through the roll of slight miscues (“Lehman repo looks solid”, April ’08), shame (“believe Fuld, Lehman bears are liars”, July ’08), survivable embarrassment (“this is the bottom in banks’ equity!” July ’08), and more shame (“Ireland is a great example of free markets in action, wait, no, a terrible example of government interference”, 2006-2010) in bemusement.  At least Tom Brown’s stock tip is a wee bit higher than it was when he tipped it.

Why do they set themselves up for a fall like that, I wonder? Volunteering to be part of the collateral damage seems to be compulsive. The latest to stick his neck out is the respected Housing Wire commentator, Paul Jackson.

Hang it, don’t spare a thought for him at all. He should know better than to combine a shoddy defense of document forgers with a drive by shooting of servicer critics.

The starting point of the piece is the celebrated DocX document fabrication price sheet, which, having debuted in the blogosphere in early October, made it onto TV the week before last, brandished in the mitt of Rep. Maxine Walters. This is why it matters (from the class action against LPS):

Docx is a wholly owned subsidiary of LPS. Docx is the largest lien release and assignment processing firm in the U.S., with more than 100 employees. Docx software is used by banks to track U.S. residential mortgages from the time they are originated until either the debt is satisfied or the borrower defaults. When the borrower defaults and the bank decides to foreclose, LPS assists the bank in preparing the paperwork that is filed with the court.

But the price sheet is old news, says Paul Jackson, very old news. So old, in fact, that it means nothing:

Here’s the real bombshell about the now-infamous DocX pricing sheet: It is very much real, but it was in use more than a decade ago, and last seen years before LPS actually acquired Docx in late 2005. No wonder my sources couldn’t remember seeing it. Who would recall a 10-year-old pricing sheet from a then-much-smaller company in an obscure corner of the mortgage services world?

It mattered then; and, if DocX got big, and was still doing the same things, then it does matter now, too, Mr Jackson. Just asking a rhetorical question isn’t enough to rebut that point. Try harder.

It’s not just the grandstanding Maxine Walters, and other “congressional leaders” who are in Jackson’s sights, but also state attorneys general, “consumer groups”, “Carol Asbury, the Florida-based foreclosure defense attorney that first posted the DocX pricing sheet on her blog”, “consumer websites, including the Naked Capitalism blog” (I bet Yves likes that characterization), and, last but by no means least those dreadful “foreclosure defense attorneys” with their shoestring budgets and not-rich clients. A platoon of tiny assailants picking on the poor old multibillion dollar servicing industry. So unfair to the servicers! Be still, my beating heart, fer chrissake.

In short, Jackson’s shooting at pretty much anyone who thinks LPS, the not-too-happy owner of DocX, is full of it; but Jackson’s stance, devoid of evidence as it is, amounts to nothing more than a smear:

But the same level of scrutiny now applied to servicers ought to apply to both sides of this very heated debate, including those making the accusations. That those so aggressively accusing mortgage servicers of lying and fraud may themselves also be guilty of the same is a troubling trend.

Whoa, where did that come from? How did the ten-year-old DocX price sheet mutate into evidence of lying and fraud by the accusers of mortgage servicers? Well, you can catch Jackson’s weaselling in full view here: “may themselves also be guilty of the same is a troubling trend”. That’s all he’s got. A little semantic shift turns a baseless, indeed counterfactual speculation into “a troubling trend”, in the space of half a sentence. On he limps, immediately and artlessly exposing his own modus operandi:

Because it begs important questions: What other fact patterns have been twisted around? Who can we really trust to tell the truth here?

Another semantic shift: now the “fact patterns” have definitely been “twisted around”. Two sentences of low grade rhetoric, and you have a case! If only it were that easy. My tip to Mr Jackson: don’t mistake rhetoric and conviction, nor your own obliviousness to recent court cases,  for evidence; your readers certainly won’t; and on the Internet, everyone can see what you’ve been up to, for ever.

But yes, the question is indeed begged. Let’s see if we can get an idea of who might be twisting what facts.

First, Jackson’s bombshell is a dud. The very age of the price sheet, centrepiece of his argument is, um, old news. LPS pointed that out in its October 6 conference call.. The helpful Skeptic99 makes Jackson’s point six weeks earlier than Jackson, in a comment to Yves’s first post in this subject. We should note that Skeptic99 comment is dated October the 18th, rather a long time after the post itself (5th October). That, of course, is not the typical NC commenter pattern: they put their stuff up within a day or two at the most of the initial post. Not that I’m certain, but if you are a dopey corporation getting a news management campaign together, it might indeed take a couple of weeks to realize what a disaster the initial news (and accompanying bear raid) represents, get lawyered up and sort a line out, hold an investor conference, plan the PR campaign, and trot through the hostile links you have assembled, making challenging comments, anonymously. But as we will see, if Skeptic99 is a sockpuppet aligned with LPS, his comments verge on counterproductive (again not implausible; one investor told Yves that LPS’ crisis response was the worst he had even seen).

Note the similarity between Jackson’s main claim and Skeptic99’s talking points, which are in turn pasted from a transcript of the LPS conference call:

So when we see information coming out of these blogs that are not fact based we’re not going to be able to respond to every nonfactual blog item that comes out. When you look at this particular blog that introduced this price sheet under DOCX, this is the price sheet that relates back to early 2000, we think 2001, 4 years before we owned the entity.

Now it appears that Jackson simply made his own investigation, well after the fact, came across the LPS conference call discussion, and took it at face value. Not insanely great beat journalism, that, but there’s nothing unethical about it. I am impugning Mr Jackson’s journalistic competence, not his ethics, for the moment. Tip to Mr Jackson: do try to keep up with the stories.

Second, the age of the price sheet is perfectly irrelevant. From the conference call transcript:

What the service was and again this is not underneath us, what the service was, was basically you are talking about a very manual environment and throughout the mortgage process documents are required not just in foreclosure. And so what we did, because it was a very manual process to get records from counties and because there were a lot of records needed in the various transactions that occur in servicing a mortgage, we established a network or DOCX established a network of what we call runners. Employees or contractors in each significant locale that if a customer had a loan that was missing information they could call us, we would call our runner in that area, take a run down to the courthouse, then find this piece of documentation related to this loan that this lender doesn’t have in their files.

So, under the spotlight of a falling stock and unfavorable press, note that there is no denial by LPS. Nowhere do they say that the price sheet listed services that the company ceased offering long ago. Yet that is precisely the conclusion Jackson tries to make us jump to, despite the absence of any evidence to support his assertion.

You’d expect a flat denial if the truth was on the company’s side. Instead, the conference call features an  unilluminating discussion of how its services were to contend with a heavily “manual” environment, and seeks to imply that what DocX did was always based on getting information from public records, and therefore valid and not at all suspect. There is not a hint of suggestion that the service offerings changed, irrespective of whether it’s 2000, when the price sheet was knocked up, or 2005, when LPS took over DocX, with the securitization bonanza in full swing, or April 2010, when they shut DocX down. Well, LPS say they shut it down, but then, so does the Florida AG; so someone’s lying about that, too. Whatever the year, it’s the same legal framework, the same paper-heavy process, the same need for the same document set priced up in 2000. DocX either had the 2000 pricing model and prices, or they changed the pricing model and the prices between then and now.

It makes no difference. DocX were getting paid for doing something, and LPS, even when under the interrogation lights, offers no reason to think it wasn’t the same sorts of things all along. Tip to Mr Jackson: when constructing your story, try to keep the big picture in mind, and monitor your assumptions for plausibility.

While I’m at it, I’d better answer Sceptic99’s concluding question:

There are few possibilities as I see it: 1)the CEO of LPS doesn’t understand his own business and is simply clueless, 2) he is lying about committing fraud and is therefore committing fraud again by misleading analysts and shareholders on a public call, or 3) DOCX was actually performing a legitimate and legal service and you have misinterpreted the terms on this pricing sheet.

I would appreciate your thoughts on this matter. Thanks.

Well, you can rule out 3), I should think. Eventually, we might get an adjudication on whether 1) or 2) applies, and how much of each. For what it’s worth, LPS’s shareholders’ lawyers may agree with me: a class action against LPS kicked off at pretty much the same time as this stuff went public (and I doubt if that’s a big coincidence). So those are my thoughts, Sceptic99; I hope you like them. Back to Jackson.

Third, there is evidence supporting the notion that DocX continued offering document fabrication services into more recent times. Nick Wooten, an Alabama lawyer who has been heavily involved in foreclosure defense, recognized the service codes on the DocX price list, as did other attorneys in his circle (Wooten is involved both in the group of foreclosure defense attorneys around Max Gardner, as well as in contact with colleagues in the Southeast). Per Nick:

We’ve been seeing these codes on the documents produced by the foreclosure mills in court for years, and wondered what they meant. The light bulb went off when I saw the DocX list. It’s their codes.

So the supposedly dated price list turns out to be very much current. The service codes were in use well after 2001; attorneys like Wooten are involved almost entirely with loans originated in the 2004-2007 time frame.

Similarly, a Florida attorney general’s investigation, was also on the trail of DocX abuses in 2010, again indicating that the questionable practices were of recent vintage. It might behoove Jackson to check his own archives, since this report comes from HousingWire in June of this year:

The Florida Attorney General’s office is investigating Fidelity National Financial (FNF: 13.88 +0.73%), its former subsidiary Lender Processing Services (LPS: 31.12 -0.03%) and LPS subsidiary Docx, alleging the companies used false documents to foreclose on Florida homeowners….

The civil investigation revolves around allegations that FNF and LPS may have engaged in creating and manufacturing “bogus assignments” of mortgage ownership in order to perform foreclosures quicker, the Florida AG’s office said on its website.

The documents in question appear to be forged, incorrectly and illegally executed, false and misleading, the AG’s office claims, adding the documents were used in court cases as “real” documents of assignment, used to expedite foreclosure proceedings in the state.

Tip to Jackson: get better sources; do background research.

Fourth, I said “document fabrication “, and I meant it. Says Jackson, rather pompously:

I wouldn’t claim to truly know what “recreate entire collateral file” ultimately means, for example, although consumer attorneys suggest it means forging documents from whole cloth. (I’ve of course been told otherwise by title industry experts.)

Aww Paul, those sources. If they don’t have a clue, and you don’t have a clue, and then they tell you something, you still won’t have a clue. That is how it works. Tip: cultivate a critical attitude to your sources: are their claims consistent with the other info that you have?

That’s assuming you have any other info, of course. Robosigning, for instance, is the sort of other evidence one might take into account. Or multiple attempts by different banks to foreclose on the same property. Or affidavits that the signer later repudiates in court. That type of thing. You might wish to consult www.nakedcapitalism.com (try the real estate tag), or www.4closurefraud.com, or www.rortybomb.com, or www.ritholtz.com/blog, to get an idea of what’s been going wrong, squarely in the middle of Housing Wire’s patch, possibly for up to a decade.

The notion that “recreate entire collateral file” has some sort of innocuous explanation is bogus. Tom Adams, an attorney and mortgage industry lifer, explains the role it serves:

The collateral file is the collection of documents which represent the ownership interest in the mortgage loans.

The collateral file is intended to be the documents which give the trust rights of enforcement or potential rights of collection. It is distinguished from origination documents – such as the mortgage application and documents required in the origination process, such as appraisal, letters from employer, bank statements, tax returns, etc. It is also distinguished from the “servicing file” which includes documents that are created, electronically or otherwise, during the life of the loan, such as letters to the borrower or notes from collectors. All of these may be kept by the servicer.

The collateral file is defined in each PSA (often identified as the “mortgage file”). These documents are clearly required to be held by the trustee to announce and require that the trust holds the things which create the “collateral” for the trust.

Now why is the idea of recreating a collateral file suspect? The most important document in the collateral file is the note, the borrower IOU. This is a negotiable instrument, and it is exempt from laws permitting electronic signatures. In judicial states, the party foreclosing must present the note, and evidentiary rules require it to be an original, with so-called wet ink signatures. Recreating an entire collateral file thus inevitably entails recreating the note, which in turn means forging the borrower’s signature on a commitment usually worth hundreds of thousands of dollars. We don’t tolerate even minor forgeries of checks, another type of negotiable instrument, but Jackson would have us believe, based on the assurances of his apparently know-nothing title insurance industry source, that creating bogus negotiable instruments and forging signatures is completely acceptable behavior.

Another service on the DocX price sheet, and just as dubious, is “create note allonge”. This should be an impossibility, at least for a party concerned with observing the law. Under the Uniform Commercial Code, an allonge is to be so firmly attached to the note as to not be able to travel separately. It is used to allow parties to provide additional endorsements. Those endorsement again need to be wet ink signatures, by authorized parties. Thus the only legitimate allonge that DocX could create is a blank sheet of paper; the parts that have any legal meaning are a signature, name, and title of an authorized individual of the entity that owns the note. And since allonges are generally used (and abused) as a way of appearing to convey notes through specified parties, “create allonge” is almost certain to mean “create one with multiple signatures”: which means electronic forgeries. And this sort of document appears with impressive frequency in court cases, with pixellated signatures (that is, they are electronic, not actual signatures), and often visibly Photoshopped to fit the signature line.

This snapshot from a 2003 DocX archived webpage (hat tip Lisa Epstein of ForeclosureHamlet.org) supports our interpretation (click to enlarge; DocX web pages became much less forthcoming over time):

Note the “preparation of note allonges in lieu of note endorsements”. That’s an admission of fabrication of signatures.

For my part, I think the consumer attorneys have it right. The rubric “recreate entire collateral file” most probably means “recreate entire collateral file”. Tip to Mr Jackson: if you’ve got a source who offers an alternative theory, make sure you understand what it is, and why he might be offering it, before you treat it as authoritative; and if (if) you actually think there’s something in it, you might consider disclosing that theory to your readers’ scrutiny, too.

Fifth, I should point out that not everything Jackson writes on this subject is utter garbage. Though he has no clue about how things got so screwed up, he is properly outraged about the back-office mess that spawned the riot of fraud that we now see. Yet, puzzlingly, he doesn’t join the dots: once you have a big paperwork mess, the only way to keep the slowly disintegrating show on the road is to forge documents. Denying this is futile, but he tries, anyway. Why?

Finally, there is a last piece of  Jacksonian windbaggery:

…in the dispute over foreclosures, as with nearly every other dispute in life, reality ultimately lies somewhere in between two extremes.

…and then a piece of his sky falls in. In an unfortunate piece of timing, for Mr Jackson anyway, some other dodgy document chains surfaced on Friday, along with a bunch of non-lawyers pretending to be lawyers. Check out the attorney signatures here (the second Scribd panel down), or the gloss from Yves. Even Jackson can tell this is a no-no; an agonized tweet from @pjackson may capture his response to this news:

I just read something tonight that has utterly blown my mind. If true, the corruption involved is beyond pale. All I’ll say for now.

Voila. Indeed, best to pause for thought, right there, Mr Jackson. Wouldn’t want to risk your reputation defending that one, too, would you? You’re in quite deep as it is; time to rummage around for that reverse gear, if you have one, on your pulpit.

In the end, Jackson’s piss-poor journalism, and his imperilled credibility as a pundit, do turn out to have a great big ethical implication. The people he is speaking up for, and the stand he is taking, are profoundly antisocial. Denying, and thus, tolerating, this fraud involves even more collateral damage than a blogger’s standing, more even than abused mortgage holders, clouded title and a stalled housing market. The ultimate destination would be capitalist society without contract law: impossible. Says Tom Adams:

To date, courts have consistently sided with servicers and trustees because of the power dynamics (big banks vs. borrowers in default).  With all of the recent news, I suspect many judges are reconsidering this, especially in light of the significant case law history which would be unsympathetic to the position of the servicers/trustees.  To consistently hold for the servicer/trustee with poorly documented or protected collateral rights would create a very problematic set of precedents for other types of notes and contracts.  This is why attorney generals and judges should be very considered about the current state of mortgage industry.  It is a disaster for the rest of the legal world and no judge wants a collection of precedents set in their state where they have to ignore the UCC, prior precedents and common sense, in order to find for the servicer/trustee.  It is truly a terrifying issue.