of the mainstream media, with the notable exceptions of the New
York Times and Washington Post in
particular which "get it" as to the nature
and the scope of the robo-foreclosure scandal, have
demonstrated a lack of concern (I would argue a lack of
knowledge of the legal complexities of foreclosure) for the
fraud committed by major lending institutions.
of this attitude was an opinion in the Arizona
prolong housing slump:
of the nation's largest mortgage lenders have frozen home
foreclosures, the result of a burgeoning scandal regarding
how banks have been handling the complicated process of
foreclosure. In Arizona, those lenders include
Bank of America, two of the state's largest
some banks bungled the foreclosure-documentation process? Evidence
suggests they may have. Is this freeze a threat to the
housing recovery that must lead Arizona and the U.S. out of
the recession? It most certainly is.
reasons behind the scandal are infuriatingly obvious to
anyone reading the horror stories in The
by our Catherine Reagor, or watching the reports of KPNX 12
News reporter Melissa Blasius. The evidence they have
compiled of haphazard
callous treatment of homeowners is disturbing.
a "resolution" of the scandal that requires months
or years of court battles could cause even greater pain. All
50 states are contemplating legal action. Class-action
lawsuits already have been filed, and ambitious lawyers are
signing up entire neighborhoods as clients.
Congress, as always among the last to see the consequence of
its actions, is calling for investigations.
nation's lawmakers in fact may be the last line of defense
against this fast-expanding crisis, discouraging as that may
seem. The rights of homeowners must be protected, but at the
same time the
American legal system should not constitute an economic
suicide pact for the entire country.
that? The robo-foreclosure scandal is just 'bungled"
and "haphazard" paperwork that can be readily
fixed over time by lenders. There was no fraud in the origination
of these mortgages or the sales of mortgage-backed
securities in the derivatives market. Those damn lawyers -
50state Attorneys General, mind you - are just
legal vultures looking to make a quick buck off lenders and
traders who simply made "mistakes" in
paperwork. Their suggestion seems to be that Congress
should immunize lenders and traders from lawsuits. Forget
about all those troublesome laws. Let them conduct business
someone who used to do foreclosures and deed of trust sales
as part of my practice, I can tell you from personal
knowledge and experience that this robo-foreclosure scandal
is not as simple as the Arizona
Republic misleads its
readers to believe.
Madrak writing at crooksandliars.com describes the problem. Just
A 'Handful' Of Problems? Nope, At Least 4,500 Houses In NYC
With Improper Mortgage Foreclosure Documents:
know all those snide remarks the financial bobbleheads have
been making about a "handful" of foreclosures with
New York City alone, it's
more than 4,000:
of foreclosures across the city are in question because
paperwork used to justify the seizure of homes is riddled
with flaws, a Daily
have suspended some 4,450 foreclosures in all five
boroughs because of paperwork problems like missing and
inaccurate documents, dubious signatures and banks trying
to foreclose on mortgages they don't even own.
city's not alone. All 50 states are investigating
foreclosure paperwork, evicted homeowners are hiring
lawyers and buyers of foreclosed homes are fretting over
the legality of their purchases.
week, New York's top judge, Jonathan Lippman, began
requiring all bank lawyers to sign a form vouching for the
accuracy of their foreclosure paperwork.
could have been a problem for one Long Island foreclosure
that was being brought by GMAC Mortgage last year.
sworn affidavit dated March 30 was signed by someone
identified as Sherry Hall, vice president of a
days later another sworn affidavit surfaced in another
Suffolk County foreclosure, this time signed by a GMAC
vice president named Sheri D. Hall.
the difference in the names, the signatures were identical
- and were vouched for by the same notary.
Supreme Court Justice Peter Mayer refused to approve the
foreclosure bearing the name Sherry Hall and ordered her,
and the notary, to appear in court Nov. 17. GMAC officials
did not return calls.
nice to know someone in authority is looking at the fine
Derek McCoy, the delinquent homeowner in the case who's
trying to keep his Coram home with a loan modification.
issued his decision Sept. 21, the day after GMAC, which
was rescued from failure with a $17 billion taxpayer
bailout, suspended foreclosures in the 23 states where
court approval is required, including New York.
moratorium, which ended last week, came after GMAC
"robo-signer" Jeffrey Stephan admitted in a
Maine case he'd signed 10,000 foreclosure documents a
month without reviewing them.
also robo-signed in New York. The News found six Bronx
foreclosures with his signature, including five in one
one case, a judge halted foreclosure on an E. 242nd St.
property because Stephan's affidavit did not include
supporting documents. The case resumed after GMAC
submitted the documents - and a new affidavit.
are also seeing banks foreclosing on homes they don't yet
a problem that concerns Brooklyn Supreme Court Justice
said it's become increasingly "murky" trying to
determine who holds a mortgage at the time of foreclosure
because they're often passed from one lender to another.
a state Senate committee hearing last year, Schack
testified that the lender must prove it holds the mortgage
on the day the foreclosure is filed.
simple, but unfortunately it's not so simple at
times," he said.
August, Schack dismissed a foreclosure the Bank of New
York was bringing on an E. 48th St. home in Brooklyn that
was filed 61 days before the mortgage was assigned to the
judge dubbed as "nonsensical" a computer
printout the bank claimed proved it held the mortgage
before the foreclosure was brought.
to this feed
York Times provides
a more in-depth analysis of the robo-foreclosure
scandal in this report. Big
Legal Clash on Foreclosure is Taking Shape:
a month after Washington
made a multimillion-dollar mortgage loan on a mountain home
near Santa Barbara, Calif., a crucial piece of paperwork
bank officials were unperturbed. After conducting a “due
and diligent search,” an assistant vice president simply
drew up an affidavit stating that the paperwork — a
promissory note committing the borrower to repay the
mortgage — could not be found, according to court
handling of that lost note in 2006 was hardly unusual. Mortgage
documents of all sorts were treated in an almost
lackadaisical way during the dizzying mortgage lending spree
from 2005 through 2007, according to court documents,
analysts and interviews.
those missing and possibly fraudulent documents are at the
center of a potentially seismic legal clash that pits big
lenders against homeowners and their advocates concerned
that the lenders’ rush to foreclose flouts private
clash — expected to be played out in courtrooms across the
country and scrutinized
by law enforcement officials investigating possible
wrongdoing by big lenders —
leaped to the forefront of the mortgage crisis this week as
big lenders began lifting their freezes on foreclosures and
insisted the worst was behind them.
officials meeting in Washington on Wednesday indicated that
a government review of the problems would not be complete
until the end of the year.
short, the legal disagreement amounts to whether banks can
rely on flawed documentation to repossess homes.
even critics of the big lenders acknowledge that the vast
majority of foreclosures involve homeowners who have not
paid their mortgages, they argue that the borrowers are
entitled to due legal process.
“have essentially sidestepped 400 years of property law in
the United States,” said Rebel A. Cole, a
professor of finance and real estate at DePaul
University. “There are so many questionable aspects
to this thing it’s scary.”
freezing most foreclosures, Bank
of America, the largest consumer bank in the country,
said this week that it would soon resume foreclosures in
about half of the country because it was confident that the
cases had been properly documented. GMAC Mortgage
said it was also proceeding with foreclosures, on a
some other banks have also suggested they can wrap up faulty
foreclosures in a matter of weeks, some judges, lawyers for
homeowners and real estate experts like Mr. Cole expect the
courts to be inundated with challenges to the banks’
is ultimately going to have to be resolved by the 50 state
supreme courts who have jurisdiction for property law,”
Professor Cole predicted.
in some states have halted or delayed foreclosures because
of improper documentation. Court cases are likely
to hinge on whether judges believe that banks properly
fulfilled their legal obligations during the mortgage boom
— and in the subsequent rush to expedite foreclosures.
country’s mortgage lenders contend that any problems that
might be identified are technical and will not change the
fact that they have the right to foreclose en masse.
did a thorough review of the process, and we found the facts
underlying the decision to foreclose have been accurate,”
Barbara J. Desoer, president of Bank of America Home Loans,
said earlier this week. “We paused while we were doing
that, and now we’re moving forward.”
analysts are not sure that banks can proceed so freely.
Katherine M. Porter, a visiting law professor at Harvard
an expert on consumer credit law, said that lenders were
wrong to minimize problems with the legal documentation.
misbehavior is clear: they lied to the courts,” she said.
“The fact that they are saying no one was harmed, they are
missing the point. They did actual harm to the court system,
to the rule of law. We
don’t say, ‘You can perjure yourself on the stand
because the jury will come to the right verdict anyway.’
That’s what they are saying.”
Willens, a tax expert, said that documentation issues had
created potentially severe tax problems for investors in
mortgage securities and that “there is enough of a
question here that the courts might well have to resolve the
the legal system begins sorting through the competing
claims, one thing is not in dispute: the pell-mell
origination of mortgage loans during the real estate boom
and the patchwork of financial machinery and documentation
that supported it were created with speed and profits in
mind, and with little attention to detail.
the foreclosure wheels started turning, said analysts,
practices became even shoddier.
example, the foreclosure business often got so busy at the
Plantation, Fla., law offices of
David J. Stern
— and so
many documents had to be signed so banks could evict people
from their homes — that a supervisor sometimes was too
tired to write her own name.
that happened, Cheryl Samons, the supervisor at the firm,
who typically signed about 1,000 documents a day, just let
someone else sign for her, court papers show.
would give certain paralegals rights to sign her name,
because most of the time she was very tired, exhausted from
signing her name numerous times per day,” said Kelly
Scott, a Stern employee, in a deposition that the Florida
attorney general released on Monday. A lawyer representing
the law firm said Ms. Samons would not comment.
McCollum, Florida’s attorney general, is
investigating possible abuses at the Stern firm, a major
foreclosure mill in the state, involving false or fabricated
loan documents, calling into question the
foreclosures the firm set in motion on behalf of banks.
lenders and Wall Street firms bundled thousands of mortgage
loans into securities so
they could be sold quickly, efficiently and lucratively to
legions of investors, slipshod practices took hold among
lenders and their representatives, former employees of these
routinely failed to record each link in the chain of
documents that demonstrate ownership of a note and a
property, according to court documents, analysts and
interviews. When problems arose, executives and
managers at lenders and loan servicers sometimes patched
such holes by issuing affidavits meant to prove control of a
Broward County, Fla., alone, more than 1,700 affidavits were
filed in the last two years attesting to lost notes,
according to Legalprise, a legal services company that
tracks foreclosure data.
many mortgage loans went bad in the last few years, lenders
outsourced crucial tasks like verifying the amount a
borrower owed or determining which institution had a right
investors who bought mortgage trusts — investment vehicles
composed of mortgages — are wondering if the loans inside
them were recorded properly. If not, tax advantages of the
trusts could be wiped out, leaving mortgage securities
investors with significant tax bills.
years, lenders bringing foreclosure cases commonly did not
have to demonstrate proof of ownership of the note. Consumer
advocates and consumer lawyers have complained about the
practice, to little avail.
a decision in October 2007 by Judge Christopher A. Boyko of
the Federal District Court in northern Ohio to toss out 14
foreclosure cases put lenders on notice. Judge Boyko ruled
that the entities trying to seize properties had not proved
that they actually owned the notes, and he blasted the banks
for worrying “less about jurisdictional requirements and
more about maximizing returns.”
also said that lenders “seem to adopt the attitude that
since they have been doing this for so long, unchallenged,
this practice equates with legal compliance.” Now
that their practices were “put to the test, their weak
legal arguments compel the court to stop them at the
gate,” the judge ruled.
finally prompted a re-examination of the foreclosure wave
was the disclosure in court documents over the last several
months of so-called
robo-signers, employees like Ms. Samons of the
Stern law firm in Florida who signed affidavits so quickly
that they could not possibly have verified the information
in the document under review.
and their representatives have sought to minimize the
significance of robo-signing and, while acknowledging legal
lapses in how they documented loans, have argued that
foreclosures should proceed anyway. After all, the lenders
say, the homeowners owe the money.
who have worked at loan servicers for many years, who
requested anonymity to protect their jobs, said robo-signing
and other questionable foreclosure practices emanated from
one goal: to increase efficiency and therefore profits.
That rush, they say, allowed for the shoddy documentation
that is expected to become evidence for homeowners in the
coming court battles.
example, years ago when banks made loans, they typically
stored promissory notes in their vaults.
the advent of securitization, in which loans are bundled and
sold to investors, required that loan documents move quickly
from one purchaser to another. Big banks servicing
these loans began in 2002 to automate their systems,
according to a former executive for a top servicer who
requested anonymity because of a confidentiality agreement.
to go was the use of actual people to determine who should
be liable to a foreclosure action. They were replaced by
computers that identified delinquent borrowers and
automatically sent them letters saying they were in default.
Inexperienced clerical workers often entered incorrect
mortgage information into the computer programs, the former
executive said, and borrowers rarely caught the errors.
record-keeping problems that are likely to become fodder for
court battles involve endorsements, a process that
occurs when notes are transferred and validated with a stamp
to identify the institution that bought it. Eager
to cut costs, most institutions left the notes blank, with
no endorsements at all.
are also likely to arise in court involving whether those
who signed documents required in foreclosures actually had
the authority to do so — or if the documents themselves
are even authentic.
example, Frederick B. Tygart, a circuit court judge
overseeing a foreclosure case in Duval County, Fla.,
recently ruled that agents representing Deutsche
on documents that “must have been counterfeited.” He
stopped the foreclosure. Deutsche Bank had no comment on
another judge on Wednesday indicated that the courts would
not simply sign off on the banks’ documentation. Jonathan
Lippman, the chief judge of New York’s courts, ordered
lawyers to verify the validity of all foreclosure paperwork.
cannot allow the courts in New York State to stand by idly
and be party to what we now know is a deeply flawed process,
especially when that process involves basic human needs —
such as a family home — during this period of economic
crisis,” Judge Lippman said in a statement.
to this feed
Not just bungled paperwork, it is FRAUD
the banks’ sloppy paperwork a matter of simple
technicalities that are relatively easy to cure, as the
banks contend? Or are there more far-reaching consequences
for banks and the institutions that bought mortgage-backed
securities during the mania? One
Mess That Can’t Be Papered Over - NYTimes:
enough, the answer to both questions may be yes.
to real estate lawyers, most banks that have gotten into
trouble because they didn’t produce proper proof of
ownership in foreclosure proceedings can probably cure these
doing so will be costly and time-consuming, requiring banks
to comb through every mortgage assignment and secure proper
signatures at each step of the way — and it surely will
take much longer than a few weeks, as banks have contended.
this has been done appropriately (not by robo-signers, mind
you) the missing links in the banks’ chain of ownership
can be considered complete and individual foreclosures can
of this will be easy, however. And it will be especially
challenging when one or more of the parties in the chain has
gone bankrupt or been acquired, as is the case with so many
participants in the mortgage business.
addressing all of these lapses is possible, according to
Joshua Stein, a real estate lawyer in New York. “If there
are missing links in your chain of title, you go back to
your transferor and get the documents you need,” he said
in an interview last week. “If the transferor doesn’t
exist any more, there
are ways to deal with it, though it’s not necessarily easy
or cheap. Ultimately, you can go to the judge in
the foreclosure action and say: ‘I think I bought this
loan but there is one thing missing. Look at the evidence
— you should overlook this gap because I am the rightful
an unwieldy process will make it more expensive for banks to
overhaul their loan servicing operations to address myriad
concerns from judges and regulators, but analysts say it can
the other hand, resolving paperwork woes in the world of
mortgage-backed securities may be trickier. Experts say that
any parties involved in the creation, sale and oversight of
the trusts holding the securities may be held responsible
for any failings — and if the rules weren’t followed,
investors may be able to sue the sponsors to recover their
market for mortgage-backed securities is huge — some $1.4
trillion of private-label residential mortgage securities
were outstanding at the end of June, according to
Industry and Financial Markets Association.
no one believes that all of these securities have
documentation flaws. But if even a small fraction do, that
would still amount to a lot of cabbage.
investors are already rattling the cage on the issue of
inadequate loan documentation. Last week, investors in
mortgage securities issued by Countrywide, including the Federal
Reserve Bank of New York, sent
a letter to Bank
of America (which
in 2008) demanding that the bank buy
back billions of dollars worth of mortgages that were
bundled into the securities. The investors contend that the
bank did not sufficiently vet documents relating to loans in
letter stated, for example, that Bank of America failed to
demand that entities selling loans into the pool “cure
deficiencies in mortgage records when deficient loan files
and lien records are discovered.” Bank of America has
rejected the investors’ argument and said that it would
fight their demand to buy back loans.
securities, like other instruments that have generated large
losses for investors during the crisis, have extremely
complex structures. Technically known as Real
Estate Mortgage Investment Conduits, or Remics,
these instruments provide investors with favorable tax
treatment on the income generated by the loans.
investors — like the New York Fed — contend that strict
rules governing these structures aren’t met, they can try
to force a company like Bank of America to buy them back.
brings us back to the sloppy paperwork that lawyers for
delinquent borrowers have uncovered: some of the dubious
documentation may undermine the security into which the
loans were bundled.
example, the common practice of transferring a promissory
note underlying a property to a trust without identifying
it, known as an assignment in blank, may run afoul of rules
governing the structure of the security.
danger here is that the note would not be considered a
qualified mortgage,” said Robert Willens, an authority on
tax law, “an obligation which is principally secured by an
interest in real property and which is transferred to the
Remic on the start-up day.” If, within three months,
substantially all the assets of the entity do not consist of
qualified mortgages and permitted investments, “the entity
would not constitute,” he said.
such failures increase taxes for investors in the trusts,
Mr. Willens said, the courts will have to adjudicate the
inevitable conflicts that arise.
if a loan originator failed to provide documentation
substantiating that what’s known as a “true sale”
actually occurred when mortgages were transferred into
trusts — documentation that is supposed to be provided no
longer than 90 days after a trust is closed? Well, in that
situation, a true sale may not have legally happened, and
that doesn’t appear to be a problem that can be smoothed
over by revisiting and revamping the paperwork.
issue of bad assignment has many implications,” said
Christopher Whalen, editor of the Institutional Risk
Analyst. “It does question whether the investor is secured
other words, were the loans legally transferred into the
trust, and, if not, do the trusts lack collateral for
investors to claim?
example, according to a court filing
last year by the Florida Bankers Association, it
was routine practice among its members to destroy the
original note underlying a property when it was converted to
an electronic file. This was done “to avoid confusion,”
the association said.
because most securitizations state that a complete loan file
must contain the original note, some trust experts wonder
whether an electronic image would satisfy that requirement.
of this suggests that while a paperwork cure may eventually
exist for foreclosures, higher
hurdles exist when it comes to remedying flaws in
mortgage-backed securities. The only way to wrestle
with the latter, some analysts say, is in a courtroom.
whole essence of this crisis is fraud and unless we restore
the rule of law and transparency of disclosure, we are not
going to fix this,” said
Laurence J. Kotlikoff, an economics professor at Boston
to this feed
been plenty of recent media attention to the prospect of
investor lawsuits over fraudulent mortgages and
mortgage-backed securities. But as Zach Carter writes at
Elephant in the Foreclosure Fraud Room: Second Liens:
four largest banks hold nearly
half a trillion dollars worth of second-lien mortgages
their books—loans that could be decimated if investors
successfully target improper mortgage servicing operations.
The result would be major trouble for the financial system.
The result would be major trouble for too-big-to-fail
nation’s four largest banks also operate the four largest
service about half of all mortgages in
the United States. They
also have multi-trillion-dollar businesses whose interests
often conflict with those of mortgage security investors.
most glaring conflicts involve second-lien mortgages.
Much of the foreclosuregate coverage has focused on
first-liens—ordinary mortgages that people take out when
they want to buy a home. But during the housing bubble,
banks frequently sold second-lien mortgages in an effort to
cash-in on inflated home prices. If you’ve had a mortgage
for a few years, and paid down $30,000 of your home’s
value, a bank might try to sell you a new $30,000 loan,
backed by the equity you’ve accumulated in your house by
paying your first mortgage.
homeowners have to put up a certain amount of money up-front
when they buy a house—this is the down-payment. But the
profits available from mortgage securitization were
tempting. Banks could issue a mortgage, sell it off to
investors, and not have to worry about any potential losses.
So banks got around down-payments by selling a second-lien
mortgage at the same time they sold the ordinary first
mortgage. The second-lien would be used to pay the
down-payment on the first lien.
is a neat trick, but if
home values decline just a tiny bit, the second lien
mortgage becomes almost immediately worthless. If a borrower
can’t pay the first lien, the second lien is wiped out
if a bank modifies a first lien to lower a borrower’s
overall debt burden, the second lien is also wiped out.
a big deal, because even when home prices have declined
dramatically, losses from foreclosure on first liens only
eat up about 58 percent of the value of the loan, according
to Valparaiso University Law Professor Alan White. The
second lien, by contrast, is 100 percent gone.
fact that four giant banks own almost half a trillion
dollars of second-lien mortgages makes things very tricky.
If a borrower gets into trouble on a first-lien mortgage,
the mortgage servicer has three options. It can 1)
foreclose, or 2) offer a loan modification that reduces the
borrower’s overall debt burden (principal reduction), or
3) tweak the payment plan, charge some immediate late fees,
and try to keep the borrower paying on the current debt
level (extending the life of the loan, forgiving missed
payments, lowering the interest rate).
either of the first two are adopted, the second lien is
wiped out. If the third option is pursued, the bank
buys an extra few months of payments for the second lien.
When the payment plan proves unsustainable, the bank can
work out a new payment plan with the borrower, and hope for
the best. This
third tack often proves destructive for both borrowers and
the first-lien owners. Tweaking payment plans can exhaust a
borrowers’ savings and makes them unable to afford a
meaningful loan modification. At the same time, it can
generate fees for the servicer that investors ultimately pay
investors believe that banks are servicing first-lien
mortgages for the benefit of second-liens. That’s because
the megabank servicers own the second liens, while mortgage
security investors own the first liens. This is a
servicer is supposed to maximize the value of the first-lien
for the investor. But it’s conceivable that
servicers–JPMorgan Chase, BofA, Citi, Wells Fargo– are
systematically screwing over both borrowers and investors in
order to maximize profits on second-lien mortgages that are,
by any reasonable economic analysis, already worthless.
market’s view about second-lien mortgages couldn’t be
clearer. Second-liens trade at 25 cents on the dollar or
less in the secondary markets. If a bank wants to sell a
second-lien mortgage to another investor, it has to take a
loss of at least 75 percent in order to do so. But
regulators have allowed banks to account for their second
liens at 90 percent or more of their original value.
every second-lien features this conflict-of-interest, and
borrowers won’t abandon every second-lien. But it’s
easy to imagine hundreds of billions of dollars in losses on
second-liens hitting the four biggest banks (see
Mike Konczal’s analysis from March here).
And the more investors learn about shoddy documentation in
the foreclosure process, the more legal ammunition they have
ultimately, is the most significant aspect of the letter
investors wrote to Countrywide this week. Investors are
pressuring Countrywide—a mortgage servicer owned by Bank
of America—to push losses from about
$16.5 billion worth of mortgages back onto the bank that
securitized those mortgages. In
this case, the bank that securitized the loans was another
division of Countrywide, so the bank isn’t going to comply
with the letter, since it means eating losses itself, and
the situation is almost certainly headed for lawsuit
Andrew Leonard’s explanation of the case here).
that letter indicates that investors are organizing to go
after improper mortgage servicing itself, not just
fraudulent loan and security sales. That means investors are
trying to sack banks with second-lien losses—and
second-lien losses could easily
dwarf the other losses that
analysts have focused on so far.
to this feed
Not just bungled paperwork, it is FRAUD
York Times last
week investigated the connection between the law firms that
are "foreclosure mills" and the Wall Street
private equity firms they represent. Private
Equity Firms Linked to Foreclosure Mills:
a surge in lawsuits against law firms specializing in
foreclosures, a case in Mississippi is casting light on
another aspect of the mortgage mess — the connection
between Wall Street private
and those law firms, often known as foreclosure mills.
lawsuit on behalf of homeowners claims that
Great Hill Partners, a private equity firm, has benefited from what the
lawsuit calls an illegal fee-splitting arrangement between
and several of the busiest foreclosure law
firms it controls. Great Hills is the biggest stakeholder in
Prommis, a company that acts as a middleman between mortgage
servicers and law firms.
lawyer for Prommis rejected that claim, and officials of Great
Hill Partners did
not respond to inquiries. But a review of public filings,
company news releases and other public statements shows that
several private equity firms or entities they control have
stakes in the business operations of some of the busiest
foreclosure law firms in New York, California, Connecticut,
Florida, Georgia and Texas.
of those law firms — like the offices of David J. Stern of
Plantation, Fla., and Steven J. Baum of Amherst, N.Y. —
are among those that are either under scrutiny by law
enforcement officials or face actions by homeowners
contending that they used inaccurate or fraudulent
mortgage-related documents. Both lawyers have denied any
wrongdoing, and neither has been charged with a crime.
influence, if any, that private investors are having on the
practices of the foreclosure mills is not clear. But the
issue is likely to be examined in coming months in lawsuits
like the one in Mississippi and as a nationwide task force
of state attorneys general start their inquiry into the
accuracy of mortgage documents.
maximize investment returns, private equity firms often
squeeze down costs in the operations they acquire. And some
legal experts suggest that could be a factor in the quality
of legal documents generated by foreclosure mills.
Miller, the Iowa attorney general who is heading up the task
force investigating questionable document practices,
said he was not aware that private equity firms had acquired
some foreclosure-related operations. While there is no law
against such purchases, Mr. Miller said the issue could
prove significant because it expanded the possibilities of
where and how the foreclosure system failed.
this is happening, this is something we are concerned about
and would want to find out more about it,” Mr. Miller said
in a telephone interview.
investors involved in foreclosure mills include a publicly
traded investment fund, Ares Capital, as well as other midsize
and small buyout firms like Great Hill Partners.
involvement of private equity firms in the legal industry is
not new. But their
involvement with foreclosure mills appears to have started
about five years ago, just as the housing market
was starting to collapse and the number of foreclosure
procedures was beginning to boom.
relationship between the Wall Street specialists and a law
firm appears to work like this: A private equity firm, in a
transaction worth tens of millions of dollars, buys a wide
range of services used by the law firm, like its accounting,
computer data, document processing and title search
departments. Then, a subsidiary of that private equity firm
or an entity it controls makes money by providing those
services back to that law firm or other businesses for a
example, about three years ago, Tailwind
Capital, a private equity firm in Manhattan,
acquired many of the business-related operations of a law
firm near Buffalo run by Mr. Baum, which does one of the
highest volumes of foreclosures in New York State. Soon
afterward, the fund bought similar operations from one of
Connecticut’s biggest foreclosure law firms, Hunt Leibert
Jacobson of Hartford.
Capital, which financed the move, is also now a
co-investor in those assets, which are held in a Tailwind
unit called Pillar
Processing, a public filing indicates.
firms receive a relatively low fee from companies that
service home loans, say about $1,200 a case for handling a
foreclosure-related proceeding. But those fees can translate
into big profits for lawyers and their private equity
partners when tens of thousands of foreclosures are
law firms and the private equity firms have structured these
deals with an eye toward avoiding legal statutes and ethical
rules like those that bar fee-splitting between lawyers and
that relationship has been challenged in the Mississippi
lawsuit against Prommis and
Lender Processing Services, is also accused in the
lawsuit of illegally splitting fees with foreclosure law
firms; it also denies doing so.
a telephone interview, Prommis’s general counsel, Richard
J. Volentine Jr., said that the company did not split fees
with its affiliated law firms and that those fees were paid
directly to those firms by the loan servicers.
its S.E.C. filing, Prommis alerted potential investors that
it could face challenges from bar associations, prosecutors
or homeowners that its relationship with its law firms
constituted the “unauthorized practice of law” or
involved “impermissible fee sharing” arrangements.
also stated in that filing that any steps that slowed the
pace of foreclosures, like government programs that
helped homeowners renegotiate loans, would hurt its revenue.
will be fascinating to see how discovery into this aspect of
the robo-foreclosure scandal plays out. There are some
big-time law firms with legal exposure here.
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