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."