Even now, years after the subprime market’s death in 2007, new stories of mortgage chicanery or accounts providing more evidence of known abuses keep surfacing. David Fiderer flagged a new one yesterday: Colorado’s two biggest foreclosure mills are under investigation the state attorney general. The Denver Post summarized the complaint:
Because the firms for years controlled the bulk of the foreclosure work in Colorado, they could profit handsomely and easily on a state law requiring legal notices to be posted on homeowners’ properties by steering that work to companies they owned or had a heavy interest in.
Starting in 2009, Aronowitz and Castle created or bought into process-service companies that would handle their workload just as the legislature was to pass a law requiring the first of what would be a pair of legal-notice postings in a foreclosure.
The law firms allegedly leveraged their stranglehold on the foreclosure market — estimates are that they control about 90 percent of the cases filed in Colorado — and conspired to fix the price to post those notices at $125, an amount five times more than what other companies charged for the same service, investigators said in court papers that included e-mail exchanges between the two firms.
Then, when their plan proved so successful — one of the posting companies made more than $2 million in the first year — at least one of the law firms worked tirelessly to persuade legislators to change state laws in a way that doubled their profits overnight by requiring a second notice, investigators said documents indicate.
The legislation requiring the postings, investigators say, was offered under the guise that consumers were getting better disclosure. But it was the law firms’ principals who ultimately profited, earning nearly $20 million in revenues in the next four years just for having the notices posted.
Now this is only one particularly creative example of bad behavior by foreclosure mills. NC regulars may have seen the article by Dave Dayen yesterday in Salon, Your mortgage documents are fake! It was based on the unsealing of Lynn Szymoniak’s qui tam suit against 28 banks, mortgage servicing companies, and document processors. That means pretty much every one you heard of in mortgage land. And her allegations, which led to a $95 million settlement (mind you, for actions filed in just two states, North and South Carolina), are familiar to anyone who has read this blog: mortgage documents (meaning the most importantly, the borrower promissory note) were not transferred to the securitization trusts in a timely manner as stipulated in the governing agreements. Trying to transfer after the cut-off date is a no-no for reasons we’ve discussed at nauseating length in the past. The last thing the mortgage-industrial complex wanted to admit was that it had sold investors non-mortgage-backed securities. Dayen’s summary:
The lawsuit alleges that these notes, as well as the mortgage assignments, were “never delivered to the mortgage-backed securities trusts,” and that the trustees lied to the SEC and investors about this. As a result, the trusts could not establish ownership of the loan when they went to foreclose, forcing the production of a stream of false documents, signed by “robo-signers,” employees using a bevy of corporate titles for companies that never employed them, to sign documents about which they had little or no knowledge.
Many documents were forged (the suit provides evidence of the signature of one robo-signer, Linda Green, written eight different ways), some were signed by “officers” of companies that went bankrupt years earlier, and dozens of assignments listed as the owner of the loan “Bogus Assignee for Intervening Assignments,” clearly a template that was never changed. One defendant in the case, Lender Processing Services, created masses of false documents on behalf of the banks, often using fake corporate officer titles and forged signatures. This was all done to establish standing to foreclose in courts, which the banks otherwise could not.
Szymoniak stated in her lawsuit that, “Defendants used fraudulent mortgage assignments to conceal that over 1400 MBS trusts, each with mortgages valued at over $1 billion, are missing critical documents…”
Do the math. Szymoniak’s suit covered well over $1.4 trillion of mortgages (note that the OECD puts the size of the subprime market at $1.3 trillion and subprime plus Alt-A at $2.3 trillion). And not all were securitized; some were kept on bank balance sheets. So Szymoniak’s suit is comprehensive. Each trust was designed to have its holdings broadly dispersed from a geographic basis.
An army of lawyers enabled this activity. We’ve had a lot of complaints about the failure to prosecute bank employees and executives, but perhaps the better question is why have virtually no foreclosure mill attorney been disbarred? Even when the firms like David Stern or Stephen Baum are targeted, the key attorneys often reconstitute elsewhere. Here is a typical report (from the Palm Beach Post) from one of the ground zeros of foreclosure fraud, Florida, in October 2012, a full two years after the robosigning scandal broke:
Florida’s attorney general has closed a high-profile investigation into alleged wrongdoing by the state’s largest foreclosure law firms with no findings..
A February Florida Supreme Court decision that upheld a ban on the state from investigating the firms under the Florida Deceptive and Unfair Trade Practices Act was the real decider, attorney general communications director Jennifer Meale said Friday…
The Florida Bar has maintained it only has the power to investigate individual attorneys. As of mid-August, 149 cases of attorney-related foreclosure fraud had been investigated by the Florida Bar with no disciplinary actions taken. There were 171 cases pending at that time.
Translation: The state AG wanted to go after the foreclosure mills. The state bar association barred that action and has proceeded to clear the attorneys. If in a state like Florida they’ve looked at 149 cases and found nothing wrong, they are going to find nothing wrong.
And why does this occur? State bar associations, once you pass the bar exam, are not professional organizations. They are social clubs. The large, high billing firms contribute to the bar association and in many cases have firm partners involved in various bar committees. Think someone in the bar is going to act against a colleague that he knows socially and who gives his club a lot of money? As candid lawyers who will tell you, the lawyers who get sanctioned are small fry, usually sole practitioners. By contrast, the foreclosure mills, which had such insane leverage ratios that those alone would show they were not maintaining work standards (one attorney to 40 to as many as 100 paralegals) were hugely profitable machines. It’s almost a given that they had the survival skills to make sure they were generous with the state bar association so as to deter any hard looks at what they were doing.
Moreover, in some locations, you also had white shoe firms doing foreclosure work for banks because the economic standing of the city had fallen (think places like Birmingham, Alabama, or Dayton, Ohio, which once had had midsized companies headquartered there but they were acquired and the legal business shifted to the new parent). So you also has some more respectable-looking players involved in this market too. Any probe of the bad actors would implicate lawyers at all sorts of other firms.
So when we talk of the loss of the rule of law, the blame should be directed first and foremost at attorneys themselves, who have shown a remarkable lack of self-reflection, much the willingness to assume responsibility, for actively enabling and covering up widespread fraudulent activity. But money clearly counts for more than a moral compass or a commitment to professional standards these days.