The Mortgage Mess: Going Nowhere Slow

It’s often said the wheels of justice grind slowly. But in the lingering agony of the foreclosure crisis, it’s reasonable to wonder if they’re turning at all.

Particularly in Florida. The state’s attorney general, Pam Bondi, has been accused of doing little investigation into either scandal-plagued mortgage lenders or the major law firms that processed foreclosures.

Bondi’s image took a major hit when two highly regarded foreclosure investigators in her office were sacked in May, while other employees have jumped ship to the industry they supposedly were overseeing. Meanwhile, her investigative powers appear seriously curtailed by an opinion from the 4th District Court of Appeal.

But the pause in progress isn’t just in Florida. An ambitious effort by the country’s 50 attorneys general to negotiate a master settlement with five leading mortgage servicers, begun last year, has little to show for it so far. There is rampant sniping among the states as to how far-reaching and punitive such an agreement should be. And there are fears it might hamstring individual states — or individual consumers — from pursuing claims on their own.

So as Labor Day approaches, the summer of 2011 appears to be a lost opportunity to investigate, litigate or alleviate the crippling mortgage crisis. It’s an issue that affects virtually everyone, because most economists can’t envision Florida’s economy, or the nation’s, recovering until the housing market does.

For those who ask “Why so slow?” the answer boils down to three essential elements, whether speaking statewide or nationally. One, there isn’t enough money. Two, there aren’t enough people. But beyond resources is a third hurdle that’s proving increasingly insurmountable. Simply, there are deep philosophical divisions among government and economic leaders over what is morally right, legally allowable and politically feasible in resolving the mortgage mess. Similar to the vociferous debate over the debt ceiling, these divisions are precluding consensus even when opposing sides agree it’s in everyone’s interest to reach agreement.

“You had a perfect storm,” said Miami attorney Jeffrey Tew, whose client list includes David Stern, the Plantation foreclosure lawyer often at the center of the tempest.

Subpoena Power

Bill McCollum was there when the storm clouds first gathered. He ran for Florida attorney general in 2006 as the real estate boom was cresting and took office in 2007 when the waves of excess came crashing ashore. Having lost a gubernatorial bid last year, McCollum recently joined the Washington law firm of SNR Denton.

He still tracks efforts to resolve the foreclosure crisis. “It’s interesting to watch it from the outside,” he said.

McCollum’s experience provides a glimpse into why investigations have moved so slowly. He subpoenaed three law firms a year ago as part of an inquiry into whether loan documents had been forged in foreclosure cases. The law offices of David Stern and Marshall Watson, two Broward County firms, and Tampa-based Shapiro & Fishman, were served.

“On numerous occasions, allegedly fabricated documents have been presented to the courts in foreclosure actions to obtain final judgments against homeowners,” a news release from McCollum’s office read. “Thousands of final judgments of foreclosure against Florida homeowners may have been the result of the allegedly improper actions of the law firms under investigation.”

Stern went to Broward Circuit Court to have the subpoena tossed. He lost.

But Shapiro & Fishman succeeded. Palm Beach Circuit Judge John Cox found McCollum’s subpoena was unlawful. The problem: It was based on the Florida Deceptive and Unfair Trade Practices Act. But legal services don’t fall under its “trade and commerce” provisions, Cox ruled. It’s the responsibility of The Florida Bar and the state Supreme Court to discipline attorneys.

McCollum said he was astonished. “I think we have that power. I was absolutely convinced the attorney general had that power,” he said.

Gerald Richman, Shapiro & Fishman’s attorney, begs to differ. “Our client got a subpoena that was outrageously broad,” he said. “They were totally sloppy in what they did.” He adds with clear disdain: “They issued a press release that convicts the law firm in the eyes of the public.”

Richman said he tried to compromise but was rebuffed. “I said, ‘Would you just narrow the subpoena?’??” he recalls. “They said, ‘Do you know who we are?’ We never would have gotten into this legal battle, but they forced us.”

McCollum appealed, but the 4th DCA backed Richman in April. By then, McCollum was gone from office, replaced by Bondi. She hasn’t asked for a rehearing, effectively rendering it the prevailing law. Tew, Stern’s attorney, expects his client’s subpoena to be quashed on appeal to the same court. “We’re expecting a similar ruling,” he said.

Investigative Limits

Law firms that handle foreclosures generally work for clients like large mortgage servicers or government-backed mortgage giants Fannie Mae and Freddie Mac. They can have hundreds of employees handling paperwork, producing the nickname “foreclosure mills.” There have been widespread allegations of practices like “robo-signing”, where documents were certified in bulk by employees without vetting or even under aliases. Other allegations include improper documentation of loan documents and property records.

Richman acknowledges there’s blame to go around but said foreclosure lawyers were playing the hand they were dealt. “You don’t question notarized documents” from clients like major banks, he said. “That’s not to say mistakes weren’t made.”

As scandals mounted, many plaintiff law firms either withdrew from the business or were fired by their lender and mortgage servicer clients. That produced more delays as replacement counsel took over thousands of cases.

As issues like robo-signing and faked documents became publicized, more consumers elected to fight foreclosure in court.

“I can’t see, with the volume of foreclosures, that anyone could adequately handle it,” Richman said.

As it stands, the role of investigating attorneys falls to The Florida Bar, but its reach is limited, said Ken Marvin, The Bar’s director of lawyer regulation.

“We investigate lawyers; we don’t do law firms,” he said. “We can’t do anything” against a professional association.

And many cases of alleged mortgage fraud didn’t involve lawyers. Mortgage modification scams have been a major issue nationally. But “you don’t have to be a lawyer to negotiate with a lender,” Marvin said. “There were mostly nonlawyers doing this.”

As of July, The Bar had issued just 11 disciplinary actions related to mortgage modifications in the last two years. There has been no disciplinary action for foreclosure fraud but 36 for mortgage fraud.

No Protection

A year into the foreclosure investigation, Bondi has become a lightning rod for criticism. “What value are Floridians receiving from their attorney general?” fumes Matt Weidner, an activist foreclosure defense attorney in St. Petersburg. “It would seem Floridians have no one to protect them.”

He added: “You take $5 from someone, and it’s a crime. You take $500 million, and it isn’t.”

In fact, the 4th DCA said McCollum “could have proceeded under another statutory provision such as a criminal investigative subpoena.”

Bondi declined to be interviewed for this article. Her office this month charged the owners of an alleged Miami mortgage modification firm, Best Value Homes, with scamming $750,000 from 500 victims. That case illustrates how slowly the legal process moves: Best Value was charged for actions in 2008 and 2009.

Bondi weathered thunderous criticism this summer when two top investigators in Broward — June Clarkson and Theresa Edwards — were forced to quit. “Ever since they let those two investigators go, we’re not seeing any results,” said Michael Redman, author of the 4closurefraud blog.

Bondi has since called for an independent investigation to review the women’s ouster. They were best known for the $2 million penalty levied against Marshall Watson, one of the law firms McCollum subpoenaed. It’s named for its principal.

But even that settlement is viewed skeptically by some. At $2 million, the amount is relatively small, and there was no admission of wrongdoing. Mary Leontakianakos, former head of the state’s economic crimes unit, which is coordinating the foreclosure probes, quit shortly before the deal was announced and now works for the Marshall Watson firm.

At issue “is whether Leontakianakos’ hiring by Watson is connected to the settlement,” assistant attorney general Andrew Spark in Tampa said in a memo before promptly quitting.

A call to Marshall Watson was not returned.

The issue of attorney general employees taking jobs with the foreclosure industry has been raised before. Joe Jacquot, who was McCollum’s chief of staff, became senior vice president of government affairs to Jacksonville-based Lender Processing Services in June.

Looking forward, the concern is whether, come Labor Day 2012, Florida’s foreclosure crisis will be any closer to resolution. TransUnion, the consumer credit rating firm, said the state’s mortgage delinquency rate — often a harbinger of future foreclosure activity — is 13.91 percent, highest in the country.

“There’s a huge tidal wave out there,” Redman said.

Source:  DBR