The following videos aired nationally on television and the web from October 18-22, 2010.

Part 1: The foreclosure freeze – what it means, why it matters

I live in South Florida, described by some as the ground zero of our nation’s foreclosure crisis. That’s afforded me a ringside seat to the foreclosure fiasco – and an opportunity to explore the issues as a consumer advocate, a journalist and, unfortunately, a homeowner.

As a homeowner, I’ve watched the value of my house drop by half since 2007 – literally hundreds of thousands of dollars of my equity has evaporated. That’s a sad story, and one I share with many others. Yet that story isn’t as sad as the story you’re about to see and read. It’s yet another lurid chapter in the book of greed – this time at the expense not just of the American homeowner, but of the American legal system.

You’ve seen the recent headlines: Major banks have halted foreclosures, some in every state, and Attorneys General from every state are now investigating the way some big lenders have been filing foreclosures. Long before the headlines – more than a month ago – I started hearing rumors of rampant, systemic errors occurring in the foreclosure process.

So I started interviewing foreclosure defense attorneys and their clients. What I found was shocking: A legal assembly line that discards legal protections for the sake of expediency, while lining the pockets of lenders and the foreclosure law firms they hire.

This is going to be a multi-part series. In this installment, I’m going to explain the freeze on foreclosures that’s recently been hitting the headlines. Start by watching the news story below, then meet me on the other side for more.

Until I started talking to foreclosure defense lawyers, I couldn’t wrap my mind around the problem I just described in that story. Over and over, the lawyers I interviewed kept repeating that bank employees and the law firms they employed weren’t reading the foreclosure filings before submitting them to a judge. And over and over, I kept saying, “So what? Of course they’re not reading all this stuff – they deal with hundreds of these things every day. What’s the big deal?”

Well, if you watched the story above, you’re now starting to get a glimpse of what the big deal is.

When you’re suing someone in a court of law – which is exactly what you’re doing when you take people’s homes in the 23 states, including Florida, that require judicial foreclosure – the person who’s signing and submitting these papers to the judge is essentially testifying under oath as to their accuracy. They’re swearing that all the facts being presented to the court are accurate. They’re swearing that the people being sued are the right people, that the lender bringing the suit has a legal right to seize the property, and that the money being demanded from the defendant is the correct amount.

Swearing to anything in court – whether in person or on paper, without personal knowledge of what you’re swearing to – is defrauding the legal system. Take another look at the analogy drawn by attorney Dustin Zacks in the story above:

“You’ve got a witness to a crime who can’t appear in person. They’re crippled and in the hospital. So he or she signs an affidavit that says I saw Mr. Smith commit that crime. I have personal knowledge of this. I examined the security video at my house, and I saw Mr. Smith commit that crime. And then, when you ask that witness about it, she says, “I just signed that document, I didn’t actually look at anything.”

That’s the criminal equivalent of the civil offense that bank employees are now admitting to, and it’s what’s behind the recent headlines about banks stopping foreclosures while they “investigate their foreclosure process.” And, by the way, you’re not seeing these headlines because lenders have suddenly become concerned about protecting people’s civil rights. This has come to light because foreclosure defense lawyers are taking legal action against lenders.

Now, maybe you’re still saying, “So what? At the end of the day, it’s still an open-and-shut case. The defendant didn’t pay their mortgage, the plaintiff still has the right to their house, and the sooner it happens, the better.” That is, in fact, exactly what some lenders are suggesting: that while the paperwork may have been improper, the foreclosures weren’t.

Here’s a quote from JP Morgan CEO Jamie Diamond in this recent article in Fortune: “We’ve known there are issues for a while,” he said of the foreclosure process. But, he stressed, “We’re not evicting people who deserve to stay in their house.”

While that may be an acceptable excuse for Wall Street, it doesn’t work here on Main Street. Because cutting corners matters in other ways:

  • It matters to homeowners like me who are patiently waiting for my biggest asset – my house – to appreciate again. That’s something it can’t do until the foreclosure flood subsides. And now, thanks to improperly filed foreclosures, that housing recovery could be pushed back by years.
  • It matters to those who have lost their homes to foreclosure, because they could possibly have used leverage gained from improperly filed foreclosures to work out a deal with a lender that could have kept them in their homes – and thus prevent their foreclosure from impacting my home’s value.
  • It matters to society at large, because due process should never be subjugated to the bottom line of any business, especially with the unwitting complicity of our judicial system.
  • Despite their soundbites to the contrary, it should matter to the offending banks, because many have now admitted to doing something illegal. Whether it’s a technicality is, well, a technicality. The bottom line is they’ve given foreclosure defense lawyers an opening – and because of potential title issues, they’re also scaring potential foreclosure buyers away.

Also keep in mind that robo-signing isn’t the end of this story. In a way, it’s the beginning.

The three defense lawyers I talked to didn’t work together – they didn’t even know each other. But they all made eerily similar claims, ones they weren’t afraid to make on-camera. Example? The quote from attorney Jeffrey Golant from the story above:

“Foreclosure firms are allowed to file foreclosures by the thousands and to cut corners and to fake documents and most of the time get judgments that they’re not entitled to in amounts that they’re not entitled to.”

As you’ll see in my next installment, what Mr. Golant is referring goes way beyond signing documents that haven’t been read. He’s accusing foreclosure law firms of creating and submitting “fake” documents to the court.

For example, if a lender’s lawyer doesn’t have the proper affidavit proving that XYZ bank owns a particular loan, someone at the law firm simply creates paperwork that says it does. He and other lawyers I’ve talked to also allege that the judgments these lenders are winning may be for amounts inflated by unauthorized fees that go beyond what a homeowner actually owes. That’s particularly relevant in states like Florida, because here the lender has the right to collect a deficiency judgment – in other words, they can pursue the homeowner for the difference between what’s owed and what they receive when a foreclosed house is sold.

As to whether these allegations are true, the jury’s still out. This is part of what Attorney General offices nationwide are investigating. But now that I’ve gone to foreclosure court and talked to numerous attorneys, it’s easy to imagine these accusations might be true. After all, in places like Florida, foreclosures are lawsuits that often last for less than a minute.

They’ve been going through the courts by the thousands for years now – lenders and their lawyers learned long ago that the papers they submit aren’t normally going to be scrutinized by a judge. It’s not a stretch to imagine that they might cut corners to save a buck. Why should they worry? They weren’t. But you can bet they are now.

In my next story, you’ll meet a guy who was foreclosed on when they’d never missed a payment – and one of the wealthiest lawyers in town.

Part 2: The mother of all foreclosure mistakes

According to this recent press release from Realty Trac, during this year’s second quarter, nationwide about one home sale in every four was a foreclosure. In former bubble markets like Florida, Nevada, and parts of California and Arizona, the numbers are even higher: 56 percent of home sales in Nevada were foreclosures. They also report that the sales price of a foreclosed home is about 26 percent below the average home’s market price, thus depressing the price of all homes in the market.

But while foreclosures have a negative impact on those losing their houses and those living nearby, not everyone is a loser in the foreclosure process. Some of the firms that produce and process the paperwork necessary to kick a homeowner out are making money – a ton of it.

Of course, there’s nothing wrong with making money, including profiting from putting people out of their homes. After all, if homeowners can’t pay, they can’t stay – and somebody’s got to do the detailed work of legally reclaiming the property for the lender so the house can be sold to offset their loan losses.

But as you read in the first article in this series, some foreclosure defense lawyers are now alleging that what some law firms are doing is playing so fast and loose with the rules that people’s rights are being trampled and courts are being defrauded. Foreclosure defense lawyers – at least, all three that I interviewed – are contending that law firms hired by banks to process foreclosures aren’t properly preparing the paperwork that separates home and homeowner.

For an example of what can happen when a law firm runs roughshod over a homeowner, meet Hugo San Martin. Watch the video below, then meet me on the other side for more.

Keep in mind that you’re not seeing this story simply because a law firm mistakenly sued an innocent homeowner for foreclosure – more on that in a minute. The reason Hugo’s story made the news is that the law firm in question – David Stern’s – didn’t just make a mistake. They didn’t correct that mistake until Hugo went out and hired a lawyer.

They could have answered any of his calls and avoided this bit of bad publicity. Why didn’t they? Probably because they were busy. Extremely busy. According to their representative, lawyer Jeffrey Tew, David Stern employs more than 1,000 people – or did. Since I talked to Tew, the firm is now apparently laying off people. But Tew says in 2009, Stern’s firm processed more than 70,000 foreclosures. If all they earned in legal fees was $1,000 per foreclosure, that’s still $70 million.

In a recent deposition of a former Stern employee named Tammie Lou Kapusta, the Florida Attorney General unearthed a reason that people working at Stern’s firm didn’t talk to homeowners like Hugo. Here’s some of Tammie’s testimony:

“The problem is that the practice was so large that there was never actually – I had actually been yelled at for trying to talk to homeowners on the phone. You’re giving them too much time. Start working.

I worked for hospice for 12 years before I went to David Stern, so I just thought that there might be some kind of compassion. I would try to deal with what wasn’t being done proper. We were directed that that was not what our job was to do. Our job was to run the team and type the MSJs (Motions for Summary Judgment), get them out the door. Get the judgments entered. Everything was about getting the judgment entered because we have to report back to the banks. “

So if this sworn testimony is to be believed, helping homeowners with legitimate mistakes at Stern’s firm took a back seat to churning out the foreclosures.

Now, as to the mistake itself: There are two ways of looking at errors like this. The first is that in any high-volume office, legal or otherwise, mistakes will get made and perhaps not properly addressed in a timely fashion (that’s just the way it is). The second way of looking at it is that mistakes like this one don’t have to be made in the first place, if the person responsible for them is willing to do what’s necessary to prevent them.

The other day I was watching two people discuss this exact issue on one of the cable news channels. The guest took the position that these types of foreclosure mistakes were inexcusable. The conservative commentator countered that mistakes happen, and he used as an example the fact that the police sometimes accidentally break down the wrong door and arrest the wrong guy. So I used the same example with Hugo’s lawyer, Jeff Golant. His response? Watch it for yourself:

Was this mistake excusable? Is it just a part of doing business? I’m sorry I can’t include a rebuttal from Stern’s firm to help you decide, but it’s not because I didn’t ask for one. They refused to return multiple calls.

Moving on: The three foreclosure defense attorneys I talked to for this series worked in – to put it politely – less than luxurious surroundings. In fact, we could barely fit our camera into their offices. In the final part of this series, you’ll see how the attorney on the other side lives.

Part 3: Are other shoes about to drop?

This is the final part – at least for now – in a series on our nation’s current foreclosure debacle.

In the first installment, I explained what’s behind the recent headlines regarding foreclosures that are being frozen nationwide: the fact that the mass robo-signing of legal documents deprived homeowners of their rights and now gives those homeowners the opportunity to successfully fight their foreclosure. In the second part, I introduced you to Hugo San Martin, a homeowner who was foreclosed on even though he’d made his payments on time. In this story, we’ll explore other potential problems that could strengthen and lengthen what’s starting to be called “foreclosure-gate.”

I’ve been doing a lot of reading lately on the foreclosure freeze, and a lot of it takes the position that while it was an unfortunate procedural error that foreclosure files were signed, witnessed, and notarized by people unfamiliar with their contents, that should be easily sorted out, and in a matter of weeks the foreclosure factories can once again start churning out the paperwork.

Here’s a quote from a recent editorial in the Wall Street Journal:

The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.

The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

In other words, this isn’t a legal problem, it’s just political nonsense.  The editorial goes on to say, “We’re not aware of a single case so far of a substantive error.”

Well, maybe the author of this editorial needs to meet Kenneth Trent, the foreclosure defense lawyer in the following news story. Check it out, then meet me on the other side for more.

As you saw from the video, robo-signing might be just the tip of a rather large iceberg. Because while some might argue that people submitting documents to a court that they haven’t read is immaterial (albeit illegal), arguing that it’s OK to take someone’s house without properly notifying them first is something else entirely. In addition, systemically signing someone else’s name on legal documents is another major potential fly in the ointment.

And when you ask Kenneth Trent, the lawyer from the video above, even these problems pale when compared to another looming issue: whether banks can actually prove that they’re the owners of these loans in the first place.

Last July Trent filed a suit contending that David Stern’s law firm violated the RICO (Racketeer Influenced and Corrupt Organizations) Act by foreclosing on thousands of homeowners on behalf of lenders who couldn’t prove they hold the original mortgages – which means they didn’t have legal standing to bring the suit.

When I talked to Stern’s lawyer, Jeffrey Tew, about this a few weeks ago, he said Trent’s suit had no merit. In fact, he called it “silly.” As you saw in my last story, Tew has also told the media that the other issues raised by Trent were also invalid and that the Stern firm has done nothing wrong.

What does it all mean?

This story is still unfolding, so it’s impossible to know at this point where it will ultimately lead. But from the time I’ve put into this story, here are some of my initial conclusions:

  • This will become a bigger issue than the banks and Stern’s representative would have you believe, particularly in states with judicial foreclosure.
  • Even as I write this, you can bet that the ranks of foreclosure defense lawyers are swelling – and those lawyers are going to find plenty of willing clients. Translation? Our overburdened courts may soon experience a lot more contested foreclosures.
  • If I were a homeowner facing foreclosure, particularly if it was filed by one of the banks that’s admitted wrongdoing or by David Stern’s firm, I’d probably at least talk to a lawyer – especially if my goal was to negotiate a deal  that might let me to keep my house. Although I wouldn’t expect miracles. It’s unlikely, for example, that your legal leverage would enable you to cut your mortgage in half.
  • If I were a homeowner facing foreclosure, what I wouldn’t expect is to permanently enjoin a lender from foreclosing. Ultimately, this will be sorted out and people who haven’t paid their mortgages will lose their homes.
  • If I were an investor thinking about buying a foreclosure at auction, I’d wait to see how things work out. While it’s highly unlikely that you’d lose a home purchased at a legitimate auction, there’s no rush. Let the smoke clear.

I’ll keep following this story – you do the same by checking back!