Fannie and Freddie's Foreclosure Barons

How fishy foreclosures earned millions for lawyers like David J. Stern—and made the housing crisis even worse.

[EDITOR'S NOTE: In November 2009, MoJo reporter Andy Kroll received a tip about a little-known yet powerful firm, the Law Offices of David J. Stern, which handled staggering numbers of foreclosures in southeastern Florida—the throbbing heart of nation's housing crisis. Among the allegations, the tipster had it from insiders that Stern employees were routinely falsifying legal paperwork in an effort to push borrowers out of their homes as quickly—and profitably—as possible.

Kroll spent eight months investigating Stern's firm and its ilk—a breed of deep-pocketed and controversial operations dubbed "foreclosure mills." After sifting through thousands of pages of court documents, interviewing scores of legal experts and former Stern employees, and attending dozens of foreclosure hearings in drab Florida courtrooms, he emerged with a portrait of a law firm—indeed, an entire industry—that was willing to cut corners, deceive judges, and even (allegedly) commit fraud—all at the expense of America's homeowners.

When an earlier version of this story first broke online on August 4, it generated lots of buzz. Columbia Journalism Review called it the "must-read of the month" and "a great piece of muckraking journalism." News sites from the Huffington Post on the left to the Daily Caller on the right featured it on their front pages. But the crucial response came from the authorities: Six days after Kroll's story went live, Florida Attorney General Bill McCollum announced an investigation into Stern's firm and two others. In September, the New York Times followed with a lengthy piece on Florida's foreclosure mess and Stern's operation in particular. A few weeks after that, further revelations of robo-signed paperwork and law firms gaming the courts have plunged the industry into chaos, with banks freezing foreclosures from Maine to California and members of Congress railing against the mortgage companies.

"Foreclosuregate," as some have dubbed the crisis, may ultimately force David J. Stern to unload a few of his Ferraris. As Kroll noted in one of his many followup posts, Fannie Mae and Freddie Mac—as well as banks GMAC and Citigroup—recently stopped sending foreclosure cases Stern's way. As of October 19, his publicly traded paper-pushing wing, DJSP Enterprises, wallowed around $1.30 a share, down from $6 in June. The company has reportedly laid off nearly 100 employees, and recently announced a major reshuffling of top leadership—with Stern himself relinquishing the chairmanship of DJSP's board of directors. Here, then, is Kroll's story much as it appears in our November/December 2010 print edition...]

LATE ONE NIGHT IN February 2009, Ariane Ice sat poring over records on the website of Florida's Palm Beach County. She'd been at it for weeks, forsaking sleep to sift through thousands of legal documents. She and her husband, Tom, an attorney, ran a boutique foreclosure defense firm called Ice Legal. (Slogan: "Your home is your castle. Defend it.") Now they were up against one of Florida's biggest foreclosure law firms: Founded by multimillionaire attorney David J. Stern, it controlled one-fifth of the state's booming market in foreclosure-related services. Ice had a strong hunch that Stern's operation was up to something, and that night she found her smoking gun.

It involved what's called an "assignment of mortgage," the document that certifies who owns the property and is thus entitled to foreclose on it. Especially these days, the assignment is key evidence in a foreclosure case: With so many loans having been bought and sold, establishing who owns the mortgage is hardly a trivial matter. By law, a firm must compete, sign, and notarize an assignment before it attempts to seize somebody's home.

A Florida notary's stamp is valid for four years, and its expiration date is visible on the imprint. But here in front of Ice were dozens of assignments notarized with stamps that hadn't even existed until months—in some cases nearly a year—after the foreclosures were filed. Which meant Stern's people were foreclosing first and doing their legal paperwork later. In effect, it also meant they were lying to the court—an act that could get a lawyer disbarred or even prosecuted. "There's no question that it's pervasive," says Tom Ice of the backdated documents—nearly two dozen of which were verified by Mother Jones. "We've found tons of them."

This all might seem like a legal technicality, but it's not. The faster a foreclosure moves, the more difficult it is for a homeowner to fight it—even if the case was filed in error. In March, upon discovering that Stern's firm had fudged an assignment of mortgage in a case before her court, a judge in central Florida's Pasco County dismissed the case with prejudice—an unusually harsh ruling that means it can never again be refiled. "The execution date and notarial date," the judge wrote in a blunt ruling, "were fraudulently backdated, in a purposeful, intentional effort to mislead the defendant and this court."

Stern has made a fortune foreclosing on homeowners. He owns a $15 million mansion, four Ferraris, and a 130-foot yacht.

More often than not in uncontested cases, missing or problematic documents simply go overlooked. In Florida, where foreclosure cases must go before a judge (some states handle them as a bureaucratic matter), dwindling budgets and soaring caseloads have overwhelmed local courts. Last year, the foreclosure dockets of Lee County in southwest Florida became so clogged that the court initiated rapid-fire hearings lasting less than 20 seconds per case—"the rocket docket," attorneys called it. In Broward County, the epicenter of America’s housing bust, the courthouse recently began holding foreclosure hearings in a hallway, a scene that local attorneys call the "new Broward Zoo." "The judges are so swamped with this stuff that they just don't pay attention," says Margery Golant, a veteran Florida foreclosure defense lawyer. "They just rubber-stamp them."

But the Ices had uncovered what looked like a pattern, so Tom booked a deposition with Stern's top deputy, Cheryl Samons, and confronted her with the backdated documents—including two from cases her firm had filed against Ice Legal's clients. Samons insisted that the filings were just a mistake, so the Ices moved to depose the notaries and other Stern employees. On the eve of those depositions, however, the firm dropped foreclosure proceedings against the Ices' clients.

It was a bittersweet victory: The Ices had won their cases, but Stern's practices remained under wraps. "This was done to cover up fraud," Tom fumes. "It was done precisely so they could try to hit a reset button and keep us from getting the real goods."

On August 10, just days after this story first broke at MotherJones.com, Florida Attorney General Bill McCollum launched an investigation of three of the state's largest foreclosure firms, including Stern's, citing dubious paperwork. "Thousands of final judgments of foreclosure against Florida homeowners may have been the result of the allegedly improper actions of these law firms," he told the New York Times, which wrote about the state's foreclosure mess in September.

Backdated documents, according to a chorus of foreclosure experts, are typical of the sort of shenanigans practiced by a breed of law firms known as "foreclosure mills." While far less scrutinized than subprime lenders or Wall Street banks, these firms undermine efforts by government and the mortgage industry to put struggling homeowners back on track at a time of record foreclosures. (There were 2.8 million foreclosures in 2009, and 3.8 million are projected for this year.) The mills think "they can just change things and make it up to get to the end result they want, because there's no one holding them accountable," says Prentiss Cox, a foreclosure expert at the University of Minnesota Law School. "We've got these people with incentives to go ahead with foreclosures and flood the real estate market."

Stern's is hardly the only outfit to attract criticism, but his story is a useful window into the multibillion-dollar "default services" industry, which includes both law firms like Stern's and contract companies that handle paper-pushing tasks for other big foreclosure lawyers. Over the past decade and a half, Stern (no relation to the NBA commissioner) has built up one of the industry's most powerful operations—a global machine with offices in Florida, Kentucky, Puerto Rico, and the Philippines—squeezing profits from every step in the foreclosure process. Among his loyal clients, who've sent him hundreds of thousands of cases, are some of the nation's biggest (and, thanks to American taxpayers, most handsomely bailed out) banks—including Wells Fargo, Bank of America, and Citigroup. "A lot of these mills are doing the same kinds of things," says Linda Fisher, a professor and mortgage-fraud expert at Seton Hall University's law school. But, she added, "I've heard some pretty bad stories about Stern from people in Florida."

While the mortgage fiasco has so far cost American homeowners an estimated $7 trillion in lost equity, it has made Stern (no relation to NBA commissioner David J. Stern) fabulously rich. His $15 million, 16,000-square-foot mansion occupies a corner lot in a private island community on the Atlantic Intracoastal Waterway. It is featured on a water-taxi tour of the area's grandest estates, along with the abodes of Jay Leno and billionaire Blockbuster founder Wayne Huizenga, as well as the former residence of Desi Arnaz and Lucille Ball. (Last year, Stern snapped up his next-door neighbor's property for $8 million and tore down the house to make way for a tennis court.) Docked outside is Misunderstood, Stern's 130-foot, jet-propelled Mangusta yacht—a $20 million-plus replacement for his previous 108-foot Mangusta. He also owns four Ferraris, four Porsches, two Mercedes-Benzes, a Cadillac, and a Bugatti.

Despite his wealth and his power over other people's fates, Stern operates out of the public eye. His law firm has no website, he is rarely mentioned in the mainstream business press, and neither he nor several of his top employees responded to repeated interview requests for this story. Stern's personal attorney, Jeffrey Tew, also declined to comment. But scores of interviews and thousands of pages of legal and financial filings, internal emails, and other documents obtained by Mother Jones provided insight into his operation. So did eight of Stern's former employees—attorneys, paralegals, and other staffers who spoke on condition of anonymity, fearing that speaking publicly about their ex-boss could harm their careers.

FORECLOSURE MILLS OWE their existence to Fannie Mae and Freddie Mac, the federally guaranteed entities that essentially created, beginning in 1968, the vast marketplace where loans are traded. Their mandate was to promote homeownership by making a large pool of credit available at affordable rates. They accomplished this by buying up mortgage debt from banks and packaging it into bonds, allowing investors to get in on the action. Banks responded by lending out more money, and Fannie and Freddie's combined mortgage portfolio exploded from $61 billion in 1980 to $1.2 trillion two decades later, according to the Government Accountability Office. Their dominance gave them the clout to rewrite rules for the mortgage industry—standardizing underwriting guidelines, loan documents, and the like.

Fannie and Freddie also reshaped the foreclosure industry. Their huge holdings meant they had to deal with thousands of foreclosures annually—even during time when relatively few loans were going bad. In the 1990s, the market expanded into subprime territory to feed the securitization beast, and borrowers began defaulting at higher rates. Hiring lawyers on a case-by-case basis was burdensome, so Fannie and Freddie put together a stable of law firms willing to litigate large bundles of foreclosures quickly and cheaply. They urged these handpicked firms to bring all foreclosure-related services—inspections, eviction notices, sales of repossessed properties, and so forth—in-house. Thus emerged the foreclosure supermarket.

In a recent speech, Stern noted the administration's homeowner-relief program. "Fortunately, it is failing," he told prospective investors.

Stern's company is one of dozens of mills that now churn through more than a million cases a year for Fannie and Freddie, big banks, and private lenders. Built like industrial assembly lines, the mills employ small armies of paralegals and other low-level employees who mass-produce court filings, run title searches, and schedule scores of hearings and property auctions daily. Staff attorneys appear for dozens of court hearings in rapid succession, dashing from one courtroom to the next with rolling file cabinets. Stern and his ilk typically create in-house subsidiaries that bill the parent law firm for the various paper-pushing tasks. "All sorts of crap is loaded on," notes Irv Ackelsberg, a Philadelphia consumer-law attorney.

The business model is simple: to tear through cases as quickly as possible. (Stern's company handled 70,382 foreclosures in 2009 alone.) This breakneck pace stems from how the mills get paid. Rather than billing hourly, they receive a predetermined flat fee for the foreclosure—typically around $1,000—plus add-ons for all the side services. The more they foreclose, the more they make. As a result, say consumer attorneys and legal experts, even families who have been foreclosed upon illegally—and can afford to make good on their mortgages—end up getting steamrolled. "It's 'How fast can I turn this file?'" says Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, DC. "For these guys, the law is irrelevant, the process is irrelevant, the substance is irrelevant."

In 2006, for instance, a federal bankruptcy judge blasted New Jersey law firm Shapiro & Diaz for filing 250 home-seizure motions presigned by an employee who had left the firm more than a year earlier. Calling it "the blithe implementation of a renegade practice," the judge slapped Shapiro & Diaz with $125,000 in fines. The following year, a federal judge in Texas fined foreclosure giant Barrett Burke Wilson Castle Daffin & Frappier $65,000 for filing computer-generated documents the judge called "grossly erroneous" and "gibberish." Likewise, Wells Fargo was fined $95,000 thanks to shoddy paperwork by Florida Default Law Group—a Wells contractor that clearly believed, according to the judge, that "filing any old pleading without undertaking any investigation into its accuracy is perfectly acceptable practice." (In April, the state attorney general's office began probing Florida Default for allegedly "fabricating and/or presenting false and misleading documents in foreclosure cases.")

In their rush to foreclose, lenders and their hired guns rarely bother exploring alternatives to dumping people on the street—options like loan modifications or federal homeowner assistance. In a 2009 survey of consumer advocates in 23 states, nearly all of the respondents said they'd gone to battle against lenders and attorneys who had ordered up forecloses without checking to see if the homeowner qualified for government help with a "workout" agreement.

In a workout, also called a loan modification, the homeowner renegotiates loan details with the servicer—the firm that collects monthly payments on a lender's behalf. When it works, everybody wins: Families stay put, banks and bondholders maintain their cash flow, and neighborhoods escape the collateral damage of yet another blighted property. That's why the Obama administration is pushing this strategy.

But even when the lender or service agrees to cut the homeowner a break, foreclosure mills often forge ahead, shoving cases through the courts before the workout deals are sealed. In essence, one hand ignores what the other is doing. As Alys Cohen, a staff attorney with the National Consumer Law Center, told members of Congress in April, struggling homeowners receive "confusing, seemingly contradictory correspondence" from the various entities.

The mills certainly have little incentive to cooperate with efforts to keep people in their homes. Indeed, says foreclosure-defense attorney Golant, once these high-volume shops run through all the subprime detritus, some of them may find themselves with little to do. "They have an interest in this going on as long as possible," she says.

"It's completely screwed up," laments Rheingold. "The machine can't be stopped, because the people who are making money operating the machine don't want it to stop."

Even Stern admits as much. In a March speech to prospective investors, he made note of the administration's embattled homeowner-relief program. "Fortunately, it is failing," he said.

 

DAVID STERN WAS WELL POSITIONED to cash in on the business opportunity offered by Fannie Mae and Freddie Mac. After graduating from law school in the mid-'80s, he took a job with the firm of Gerald M. Shapiro, one of the first lawyers to automate the foreclosure process. (Shapiro is now a partner in Shapiro & Diaz, the firm fined for its "renegade practice.") In 1993, having mastered the ins and outs of foreclosures, Stern left to open his own shop in a North Miami Beach office with, as he related in a deposition, "ugly blue carpet and pink walls." He shared the space, according to state business records, with his wife's short-lived beauty consulting company, Your Personal Best.

Stern put in his applications, and by 1997, when Fannie and Freddie rolled out their most-favored-attorney program in Florida, he was on the list. He relocated the firm to the nearby city of Plantation—taking over a strip-mall space formely occupied by a Stein Mart discount clothing store. He then hired a slew of rookie attorneys whose job was primarily to rubber-stamp legal documents. One attorney whom Stern brought on in 2007, fresh from law school, told me she was ordered to sign legal filings that superiors had dumped on her desk before she had a chance to read them. She eventually quit. "Ethics are thrown out the door," she said. Another lawyer, who deals with the firm regularly, told me that Stern's seasoned employees belittled the newbies, referring to them simply as "bar licenses."

Reducing the foreclosure process to data entry wasn't an entirely novel idea, but Stern set out to perfect the model. His minions created a master database dubbed "the Bible," with information on anything that could possibly relate to a foreclosure case in Florida—the things specific judges required, how many file copies they wanted, clerks' phone numbers, names of judicial assistants, even warnings about when a certain judge was cranky and having a bad day. According to one former paralegal, supervisors said they would be fired if they didn't complete at least 15 daily "casesums"—information summaries for new cases referred to the firm. Another paralegal, who spent three years at Stern's firm, said there were unofficial contests to see who could jam a case through the fastest. "Somebody would get a 76-day foreclosure," she said, "and then someone else would say, 'Oh, I can beat that!'" (An uncontested foreclosure in Florida typically lasts 135 days, according to industry analyst RealtyTrac.)

While rushing foreclosures isn't illegal, Stern's fledgling firm was promptly accused of something that is: gouging people who are trying to get out of default. In October 1998, Tallahassee attorney Claude Walker filed a class-action lawsuit involving tens of thousands of claimants, alleging that Stern had piled excessive fees on families fighting to keep their homes. (Walker, who visited Stern's offices in 1999 to collect depositions, described the place as "a big warehouse" where hordes of attorneys holed up in tiny, crowded offices "like hamsters in a cage.") After several years of battling in court, Stern settled for $2.2 million. Based on that case, the Florida Supreme Court and state bar association later reprimanded him for "professional misconduct."

A few months after Walker filed his class action, former paralegal Bridgette Balboni sued Stern personally for sexual harassment. The case details read like something out of Animal House: Balboni said Stern grabbed female employees from behind and faked sex with them, stuck his tongue in one woman's ear, and joked that another woman used her pager as a vibrator. Balboni, who settled for an undisclosed sum, declined to discuss the case, but five other women who have worked for Stern told me of similar behavior by the boss. Several used the word "pig."

Legal setbacks aside, Stern remained on a roll. Two years running, in 1998 and 1999, Fannie Mae named him "Attorney of the Year." (A Fannie spokeswoman did not respond to requests for comment.) After the Walker case settled, Stern and other foreclosure attorneys hired lobbyists as part of a campaign to convince Florida lawmakers to cap class-action damages in consumer lawsuits. The Republican-controlled legislature obliged in May 2001. Tew, Stern's attorney, shares a legal practice with former Florida Republican Party chairman Alberto Cardenas—a prominent DC lobbyist and GOP fundraiser. Cardenas has also served on the board of Fannie Mae and lobbied on its behalf. 

Stern continued cramming more employees, documents, and computers into his strip-mall headquarters. From 2005 through 2007, city inspectors repeatedly cited the firm for code violations such as blocking exits and fire sprinklers with storage, and for creating a hazard by stringing extension cords between departments.

The cases kept coming. From 2006 to 2008, as the number of Americans losing their homes doubled, Stern's case referrals nearly quintupled, and lenders sent him 12 times as many repossessed properties to sell off. Revenues just for Stern's non-legal operations—titles, home sales, and default processing—leaped from $40 million to $200 million, and his payroll swelled from 400 to nearly 1,000 employees. (Orientations for new hires were a near-weekly affair, said a former secretary.) In 2008, flush with cash, the firm left its strip-mall digs for a luxurious building down the street overlooking a small lake.

"I don't have any confidence that any of the documents the court is receiving on these mass foreclosures are valid," said the judge.

Amid this meteoric rise, interviews and court records show, Stern's operation began to cut corners. Beyond the backdated assignments, employees told me that the firm routinely doctored legal filings. Case chronologies—the timeline of important events in a foreclosure—were changed "all day long" to create the appearance of propriety, notes a former Stern paralegal. Internal documents show that the firm attempted to push cases through the courts even when key documents like the assignment of mortgage—or the mortgage contract itself—were missing from the file. "Need to re-set. No original loan docs," a Stern attorney wrote in a July 2008 memo after being rebuffed at a Tampa court hearing. At a Stern hearing in April, Pinellas County Judge Anthony Rondolino got so fed up with bad behavior by the mills, he declared, "I don't have any confidence that any of the documents the court is receiving on these mass foreclosures are valid."

That same month, a Fort Lauderdale attorney filed a class-action lawsuit against Stern and his firm, accusing them of racketeering and claiming the firm deliberately hid the true ownership on mortgages in cases involving "tens of thousands" of homeowners. A second suit, filed just days later, claimed that Stern's firm had refused to hold up a foreclosure on a couple in Port St. Lucie, even after it was clear that they hadn't had so much as been late with a payment. 

Despite Stern's track record, banks and lenders continued to funnel him more than 5,000 new cases a month—and Fannie and Freddie kept him as a designated counsel until mid-October. This past summer, a Freddie Mac spokesman had cited Stern's "good standing" in Florida, adding, "We certainly want all of our vendors to follow federal and state law." (Neither Wells Fargo nor Bank of America—which work with Stern while publicly cheering Obama's housing-relief programs and rolling out their own—would comment directly on their relationships with Stern. In an email, a Wells spokeswoman noted that the bank monitors all of its attorneys and adjusts its referrals accordingly.)

The problems at Stern's firm weren't confined to the courthouse. Supervisors would instruct their staffs to ignore or hang up on homeowners who called in with complaints—no matter how justified—according to several people who worked there in the past five years. "You would get calls from people saying, 'We are going to be evicted today, and I just got out of the hospital. I just had a baby,'" a secretary told me. "I'd go into my boss' office, and she'd say, 'That's their problem.'"

A former employee from Stern's reinstatement unit—which is supposed to help borrowers get out of default—also spoke of a culture of indifference. "I've had people call and tell me the locks were changed because their house had been sold at auction" without them knowing, she said. "But you would get in trouble if you were on the phone for a long time with the borrower."

Consider the case of Holly and Rory Hewitt, who for years faithfully made monthly payments on their modest one-story house on what was once an orange grove in Loxahatchee, Florida. In October 2007 their lender, Countrywide, erroneously informed the couple that they were in default. The Hewitts, who had the money, immediately called and asked how much they owed so that they might get things straightened out. Soon after, a reinstatement letter arrived on the letterhead of Countrywide's legal counsel—the Law Offices of David J. Stern.

The $18,500 bill was larded with charges—property inspection, title, and late fees that seemed exorbitant even in an industry renowned for arbitrary fees, plus monthly loan payments that weren't yet due. In addition, Stern charged the Hewitts for serving legal papers not just on Rory and Holly, but on a nonexistent spouse for each. In all, the couple was being gouged for thousands of dollars. The Hewitts took their story to a local legal aid organization, which passed the case to a private attorney. It would eventually become the core of another class-action suit—one of two pending cases alleging that Stern had dumped junk fees on some 3,500 homeowners who were trying to escape default.

Stern's attorney insists publicly that the fees were reasonable and legal. But the lawsuits claim that Stern's firm often tripled the standard title fee, charged for serving papers on fictitious people, and demanded payments and fees that homeowners plainly didn't owe—violating Florida laws against predatory debt collecting and deceptive trade practices. Stern, the filings allege, is personally to blame. "These people are scratching coffee cans to get enough money to reinstate their mortgage," says attorney Claude Walker, who is not involved in the current cases. "You don't have to go take nickels and dimes from people who are trying to save their houses."

 

A NICKEL HERE, A DIME THERE, and pretty soon you're talking real money. Stern's back-office operations cleared more than $44 million in profit last year. Last December, a Chinese acquisition fund purchased those departments and spun them off into a company called DJSP (David J. Stern Processing) Enterprises. Incorporated in the British Virgin Islands—a notorious tax haven—the new firm processes Stern foreclosures and handles other firms' foreclosure paperwork, too.

Stern and his operations collected more than $100 million in the deal, and he retained a top role in DJSP. In January, the company's stock debuted on the NASDAQ at $9.25 per share—and with that, the small outfit he had launched in 1994 in an ugly North Miami Beach office was worth in the neighborhood of $300 million.

The company's stock took a hit in May, after Stern warned investors of lower earnings due in part to a slowdown in referrals by a big client, and also to the Treasury Department's renewed homeowner-relief efforts. Share prices tanked further after angry investors, claiming Stern knowingly misled them, hit him and DJSP with a securities-fraud class action. (This fall, under fire in the wake of our investigation and subsequent revelations, Stern stepped down as DJSP's chairman.)

Stern had gone out of his way to assure investors that foreclosures would surge in the second half of 2010 as clients processed their backlogs of delinquent loans. This past spring, he and his chief financial officer flew to Southern California to make the case for why the foreclosure industry is ripe for expansion. The setting was the annual shindig of investment banking firm Roth Capital Partners, a swank conference for hedge-fund managers and institutional investors held at the Ritz-Carlton, Laguna Niguel—a luxury hotel perched on a bluff overlooking the Pacific Ocean. Conference perks included private concerts by Social Distortion and Billy Idol.

In his speech to the money people, Stern explained why the time was right to invest. Historical data, he said, showed that people will continue losing their homes in large numbers through 2012, ensuring plenty of business. "When people say, 'Oh, my god, the economy is bad,' I'm like, 'Oh, my god, it's great.'" he told his audience. "I hate to hear people are losing homes, and credit isn't available, and people's credit is such that they can't [refinance]. But if you are in our niche, it's what we want to do, and it's what we want to see."