UNDERSTANDING THE MORTGAGE FORECLOSURE SCANDAL

COMMENTARY BY TOM BRODERSEN

Most Scandals have a life cycle of their own. This one started with the massive de-regulation begun under President Reagan, and continued over the last two decades (including the disastrous decision to abolish the Glass-Steagall Act, which President Clinton signed), with the assistance of extremely low interest rates. The too-easy mortgages which followed made the Lenders, Mortgage Brokers, and just about everyone connected to the process huge profits, and triggered the wild run-up in property values (the “bubble”).

Bubbles tend to burst, and this one certainly did, with the result that land values all across America have fallen by more than 40%, leaving most homeowners owing more on their mortgages that the property is worth. Falling incomes (due largely to corporations exporting American jobs at an all-time high rate) have triggered huge numbers of borrowers to fall behind on their payments. When people who weren’t behind in their payments called the Lender to request mortgage modifications, they were told they couldn’t qualify for modification until they were behind, so many of them stopped paying, only to wind up in foreclosure.

After the Market Crash in September of 2008, the Bush administration (with Obama’s approval) moved swiftly to save the economy from complete collapse, which would have happened within hours or days, but the “fix” was done so quickly that no adequate protections or guarantees were put in place to ensure the bailed-out Lenders would use the funds to keep lending, and keep the economy going. Unfortunately, the money that went to the Lenders was used largely to acquire their competitors, after which they sat on much of the rest of the cash (while property values went on a non-stop downward spiral). Also missing from the bailout solution was any requirement that Lenders disclose the disposition of the monies received to the government, and they resisted all attempts to get that information.

In December, the Lenders started awarding themselves bonuses, greatly angering the American people, as well as Congress. Congress reacted by creating the Congressional Oversight Panel (COP), which took their job seriously, demanding large numbers of documents from the Lenders. These are now publicly available, and are being aggressively farmed by foreclosure defense attorneys.

Foreclosure Defense Lawyers have long noted the (at best) sloppy work Lenders have done during the real estate bubble in following the law with regard to recording assignments of mortgages sold from bank to bank.

The Scandal we’re all reading about was triggered by the investigations of lenders and their foreclosure firms undertaken by various foreclosure defense attorneys, mostly here in Florida. There are four huge law firms that file most of the Florida foreclosures. Each of them have hundreds of employees, and are regarded by the defense bar as sweatshops.

In May of 2009, Thomas Ice, a foreclosure defense attorney, took the deposition of Cheryl Samons, a 14 year employee of the Law Officers of David J. Stern, P.A., the largest of these foreclosure mills. She worked in the very heart of the system that has stripped the greatest number of Floridians of their homes, frequently using documents which are highly suspect. The transcript of that deposition is linked here, and the admissions she makes about how this firm worked is shocking, to say the least. The transcript is 138 pages long. Learn all about Robo-Signers!

Over a year later, in September of 2010, the office of the Florida Attorney General took the deposition of Tammy Lou Kapusta, who worked under Cheryl Samons, and got additional details of the widespread wrongdoing at the Stern firm. That transcript is also linked here, and is 108 pages long.

The Joint Investigation involving all 50 states and the Federal Government was only recently announced, and is a result of the publicity that resulted from the Samons deposition being passed around, prompting news media coverage. At this point, there are enough resources about to be devoted to getting to the bottom of this morass that a great many answers are going to come out. The investigation will almost certainly go into other areas, that haven’t been examined yet, such as the whole process of securitization, that is, the bundling of thousands of mortgage into RMBS (Residential Mortgage-Backed Securities) Trusts, and the sale of investments in those trusts (those AAA-Rated Bonds). The work of the Congressional Oversight Committee will be of considerable use.

Going Forward, given the huge public exposure, a great deal of attention will be focused on this issue, and for an extended period of time, likely for a year or more. This attention can only help homeowners, but the danger is that state legislatures (and Congress) will attempt to “fix” the problem for the Lenders, in such a way that will deprive the homeowners of some of their “bargaining position” created by the massive revelations which will come.

For the time being, Homeowners in Foreclosure need to aggressively defend against the Lenders, using every piece of information that can be gleamed from the investigations. A great deal more offers to modify their mortgages will be made by the Lenders, but people need to carefully scrutinize them, to make sure they get every advantage they can, because whatever deal they strike, they will have to live with for years to come. Many will make deals that look good now, but in just a few month after new revelations come out, they will prove to be much less advantageous than could have been negotiated. And, of course, some of the mortgages will prove to be entirely unenforceable.