naked capitalism

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.