Some people are dismissing troubled homeowners' complaints that they were lied to about the terms of their mortgages. After all, the borrowers should have read what they were signing. But when it comes to the so-called robo-signers at the banks or Lender Processing Services (LPS), the same critique should be equally valid: By signing documents without reading them, the mortgage processors were lying under oath.
But the people who deserve the greatest scorn for their behavior in the foreclosure document scandal are the robo-signing lawyers and their colleagues who submitted robo-signed documents to the courts. These attorneys should be facing discipline and perhaps disbarment for their actions. After all, when we talk of homeowners and robo-signers at banks, we speak of people who should have known better -- and that's the lawyers' job.
Just how aware some lawyers are of how far wrong the foreclosure business has gone -- and the professional risks they run by participating in it -- is revealed by the deposition of Tammie Lou Kapusta, a former paralegal at the Law Offices of David J. Stern. Amid all the depressing details of precisely how that foreclosure mill abused the rule of law are lots of comments about how the attorneys, generally inexperienced, were terrified of being disbarred or disciplined for what they were doing, but were also terrified of losing their jobs, given the terrible legal job market.
Attorneys Knew Their Licenses Were On the Line
What made the attorneys so nervous? Well, Kapusta testified that the law firm manufactured documents as needed, backdated documents, signed more than 2,000 documents daily without reading them, switched signature pages among documents, and had three people sign the same name. She swore the firm knowingly created and gave courts documents with key information listed incorrectly, such as how much the debtor owed or which bank was foreclosing. (In these cases, the COO used her judgment to make "business decision[s]" about what to do.)
Kapusta testified that probably 50% of the time the firm failed to give homeowners notice that a bank was foreclosing on them, while simultaneously and grotesquely padding bills for the "service" by naming John and Jane Does to be served, even if they didn't exist. To keep everything going, the firm maintained a "bible" that explained how each judge scrutinized the submitted documents, so that the firm could make the documents pass muster in each court. No wonder the attorneys at David J. Stern worried about their licenses.
It's crucial to realize that Stern isn't the only firm knowingly engaging in behavior that could -- and at least for the supervising attorneys at Stern, should -- get their attorneys disbarred. The Kapusta deposition came to light as part of the Florida attorney general's ongoing investigation of that firm, but Bill McCollum's office is also investigating three other firms: the Florida Default Law Group, The Law Offices of Marshall C. Watson, P.A. and Shapiro & Fishman, LLP. But even if those were the only problematic firms in Florida, the problem is not limited to that state.
I've reviewed a couple documents from New York involving a lawyer/robo-signer named Elpinicki Bechakas of the firm Steven J. Baum, where she signs on behalf of mortgage loan registry MERS, assigning mortgages to the firm's clients to enable them to foreclose. At least one judge in a case involving her documents has recognized the conflict of interest inherent in a law firm assigning the property of one entity, presumably its client, to another entity, also its client, at least without written permission from both entities.
Now, the United States Trustees, who monitor the bankruptcy courts, are getting involved. One filed a motion in a case involving a Bechakas assignment to ask the court to find it invalid. Now that some 40 state attorneys general are on the case, I expect to hear many similar stories.
I contacted both the Law Offices of David J. Stern and the firm Steven J. Baum for comment on this article. At publication time, Stern hadn't responded. In a statement, Baum said: "While we cannot comment on individual cases, execution of assignments of mortgages by Ms Bechakas were performed in accordance with a valid MERS corporate resolution and does not constitute a conflict of interest."
Destruction of the Real Property System
Why are attorneys, who do know better, taking such career-endangering actions? Interestingly, Housing Wire, a trade magazine, has just published a revealing view from the inside titled Foreclosure Mess Exposes the Rot from Within, in which the author -- the publisher of the magazine -- discusses the industry's subjugation of its lawyers to its detriment.
... I've seen line staff at banks threaten attorneys with removing cases should the law firm fail to do their bidding, even if that bidding directly contravened existing laws. (And this was in 2004; I can't imagine what it's like now.) ...
Attorneys that manage foreclosures often aren't usually even referred to as legal counsel anymore, insofar as many banking personnel are concerned. The law firms have been flat-fee'd into "vendor" status, instead, no different than whatever vendor is delivering office supplies ....
Show me one other industry where this is how legal work gets done.
...The result is that the concept of risk -- the core of any truly good lawyering, in any field of law -- has largely become a lost art in an industry that should have been concerned most of all with managing it. The industry charged with protecting the sanctity of our nation's property rights has instead allowed them to rot in the name of 'process efficiency.'
Indeed, even though much of the coverage of the foreclosure mess, including my own, has focused on the robo-signing and the related frauds on the court, it's important to realize these are just symptoms of the massive destruction of the real property system caused by the mega-securitization of mortgages. A useful overview of the foreclosure crisis has been published by Mike Konczal, and a much shorter but perhaps more sobering look at the overall problem and consequences was just published by Citigroup. That paper, titled Foreclosures Gone Wild, correctly points out the crux of the problem driving banks, vendors like Lender Processing Services, and law firms like David J. Stern to manufacture documents:
When a mortgage is securitized and placed in a mortgage pool, there are typically four parties involved. The mortgage bank or lender originates a mortgage and then sells it to a "sponsor" who in turn sells it to a "depositor" who then sells it to the "trust" which governs the pool. Importantly, as noted above, the original paperwork must be transferred at each step of the process.
It now appears that in many cases (1) the paperwork was not properly transferred and (2) it is unclear in many cases where the actual paperwork actually rests today.
The key consequence of not transferring the mortgages properly in the securitization process is a broken chain of title, which in turn makes foreclosure -- or indeed any other transfer of ownership of the property -- deeply problematic. That's doubly true now that many of the mortgage originators are out of business. That broken chain of title has led to the manufacture of documents. Incidentally, Bloomberg reported that Citigroup is no longer using David J. Stern.
What Is to Be Done?
As many have pointed out, the crisis and the exposure of the "rot within" hurts our nation's nascent economic recovery. However a false dichotomy is being set up between restoring the rule of law and straightening out all the titles and fixing the economy. We don't have to choose. If foreclosures are replaced with meaningful modifications, for example negotiated in the shadow of reinstated cram downs, a by-product will be to give the banks and other firms involved enough time to carefully and unhurriedly straighten out the mess. It is only the need to foreclose and transfer title in a hurry that creates the tension between doing the right thing and the economically helpful thing.
Moreover, wiping out massive amounts of principal and reducing interest on a broad scale would function as a major economic stimulus, which we need right now. The fact that the stimulus would come out of the banks' pockets is simply rough justice.
As for disciplining the attorneys involved in the foreclosure mess, California has been leading the way. Where are the other state bar associations? Why isn't the profession out in front, defending the rule of law?