Royal Pain: Foreclosure King Lawyer Faces
Class Action by Angry Mob of Homeowners

By Paola Iuspa-Abbott
Daily Business Review
New York Lawyer
July 30, 2010

MIAMI - David Stern, whose law firm has helped lenders foreclose on tens of thousands of Florida homes, has been named as a defendant in a proposed class action lawsuit that alleges foreclosure actions filed on behalf of banks contained misleading information.

In order for the case to be a class action, a federal judge would have to certify it.

Read the lawsuit

The suit claims that Stern and his Plantation firm violated the Racketeer Influenced and Corrupt Organizations Act as they pressed foreclosures against distressed homeowners.

The suit, filed Monday in U.S. District Court, alleges that Stern employees and attorneys filed fraudulent court pleadings, filed suits on behalf of lenders that didn’t own debt on the homes targeted for foreclosure and concealed plaintiffs’ lack of standing to foreclose on properties.

Stern did not return a call seeking comment.

Attorney Jeffrey Tew of Miami’s Tew Cardenas, who represents Stern, said neither his client nor the law firm did anything wrong.

"We don’t think there is any merit to it," Tew said of the lawsuit.

The suit seeks billions of dollars in damages for homeowners who lost their houses in foreclosures handled by Stern’s law firm.

Fort Lauderdale solo practitioner Kenneth Eric Trent filed the lawsuit and is seeking class action status.

Since launching his legal career 16 years ago, Stern has built his business into one of the largest foreclosure firms in the country. The firm handles 20 percent of the foreclosures filed in the state of Florida, according to the St. Petersburg Times.

In addition to his firm, Stern is also chairman and chief executive officer of Plantation-based DJSP Enterprises, a company founded in 1994 that went public early this year.

The company (Nasdaq: DJSP) provides nonlegal services to law firms that represent banks in foreclosures. Stern’s law firm is a major client of DJSP, which employs about 1,200 people. DJSP recently posted a first quarter profit of $8.7 million on revenue of $71.6 million.

The new suit is the latest in a series of legal controversies involving cases filed against Stern’s law firm.

An unrelated class action suit filed in 2007, which claims Stern’s firm overcharged borrowers, is pending in Palm Beach Circuit Court. Judge Thomas Barkdull recently certified the case as a class action. The suit claims the firm charged excessive fees to borrowers being foreclosed by Wells Fargo, a Stern client.

The lead plaintiff is Loren Banner, who sought to pay the bank the money he owed and get his mortgage reinstated. Stern’s firm sent him a reinstatement letter that included charges for services his firm didn’t provide, according to the suit.

Stern is appealing Barkdull’s class action decision to the 4th District Court of Appeal. Tew Cardenas also represents him in that case.

"We hope it will be affirmed and we will proceed to trial," said Banner’s attorney, Louis Silber in West Palm Beach.

Florida homeowners with Wells Fargo mortgages who received mortgage reinstatement letters between January 2003 and February 2009 could qualify as mem bers of the class.

While the most recent complaint targets Stern and his Plantation firm, it also challenges the legality of a practice used by many law firms that have churned out hundreds of thousands of foreclosure cases on behalf of bank clients since the economic crisis started three years ago.

"I hope and believe that this action will spawn some other type of actions or will be amended so that the ultimate result will be that the foreclosure litigation industry, as we know it in Florida, is shut down," Trent said.

Trent’s client is Ignacio Damian Figueroa of Oakland Park. In the lawsuit, Trent said Stern’s firm engaged in "a pattern of racketeering activity," including "mail or wire fraud."

"What I am ultimately trying to accomplish is that people will no longer be foreclosed upon by plaintiffs who don’t have any right to foreclose," Trent said.

The complaint also named the Mortgage Electronic Registration Service Corp., or MERS, as co-defendant.

MERS is an electronic mortgage registration system created by major U.S. banks in 1995 to track servicing rights and ownership of mortgage loans in the U.S.

MERS is considered the mortgagee of record as a mortgage travels through the banking system. When the note goes into default, MERS assigns the mortgage to whomever owns the debt to file a foreclosure action against the borrower.

Trent’s lawsuit claims MERS was created to hide the true ownership of mortgages, which were often re-packaged as bonds and sold to investors.

"[MERS is] a truly effective smokescreen, which has left the public and most of the judiciary operating in the dark through the present time," according to the complaint.

Morgan Lewis & Bockius attorney Robert Brochin, who represents MERS, said the complaint lacks "any merit." He declined further comment.

The suit claims that assignment of mortgages from MERS to Stern’s plaintiffs — including some of the nation’s largest financial institutions — are often "fraudulent" because they were signed by Stern employees on behalf of MERS. Stern’s employees had MERS’ authorization to sign the assignment. Still, Trent said MERS has no power to assign a mortgage that it doesn’t own.

"Just like MERS, the assignments were meaningless shells," according to the lawsuit.

Some judges across Florida, one of the states with the highest number of foreclosures, have questioned the validity of assignments of mortgages in cases brought to court on behalf of Stern clients and the clients of other firms specializing in foreclosure actions.

In March, Pasco Circuit Judge Lynn Tepper threw out a case over an assignment that an employee of Stern’s law firm "fraudulently backdated" to "mislead the defense and the court," according to Tepper’s ruling.

Last year, foreclosure defense lawyer Tom Ice of West Palm Beach compiled 21 assignments of mortgages that he asserted had been backdated by Stern’s staff. At a May 2009 deposition, in a case unrelated to the most recent suit — Ice confronted Stern’s operations manager, Cheryl Samons, with the assignments, some of which she had signed.

"If you just look at the document itself, you will see that the expiration date [of the notary seal] is more than four years after the execution date," he said, adding that notary seals expire every four years. "Unless they are capable of time travel, [Stern employees] couldn’t have used that stamp that wasn’t going to be issued until after this document was executed."

In her response, Samons attributed the backdating to "sloppiness."

The accuracy of court documents filed by foreclosure law firms has been questioned before.

In May, the Florida attorney general launched an investigation over allegations Tampa-based Florida Default Law Group falsified legal documents to expedite foreclosure cases filed by its lender clients. That investigation is pending.

"Foreclosure Mill" Law Firms Cash in Big on Homeowner Woes

By Alec Foege
AOL. com
March 12, 2010

Who loves a depressed real estate market? A certain shady brand of law firm, that's who.

As countless Americans suffered the sting of mortgage foreclosure, the obscure Amherst, N.Y., law firm of Steven J. Baum, P.C., made millions in fees from the some of the nation's largest banks. Known as one of a handful of regional "foreclosure mills," nicknamed for their voluminous, repetitive transactions, Baum processed 12,551 lawsuits in New York City and its suburbs in 2009 -- nearly 48 per day.

According to the New York Post, the suburban Buffalo firm's business practices are now being scrutinized, thanks to a governmental legal action taken by the U.S. Trustee in Manhattan against JP Morgan Chase Bank, which retained Baum to process thousands of foreclosures, sometimes erroneously. In the worst cases, the complaint alleges, the firm filed blatantly false evidence to courts in an effort to hasten foreclosures.

Nationally, foreclosure filings have averaged around 300,000 per month over the last year, according RealtyTrac. Law firms, in addition to Baum, accused at one time or another of acting as foreclosure mills include Barrett Burke in Houston; Florida Default Group in Tampa; and John D. Clunk Co. LPA, in Hudson, Ohio. States such as Nevada and Florida, which report the highest numbers of foreclosures, are a breeding ground for such firms.

Typically, foreclosure mills use lower-paid paralegals and support staff to handle the details on the large volume of foreclosures they process. One firm employed in Florida employed 6 to 10 paralegals and other employees for each attorney, creating an assembly line of teams to handle title documents, prepare the suit, and deliver documents, among other tasks, according to the Tampa Tribune. With attorney fees from $650 to $1,200 per filing, some real estate attorneys claim these firms must focus on volume just to make a profit. But do the math: 12,551 lawsuits multiplied by $1,200 equals enough millions to keep an upstate law firm fat and happy.

So-called foreclosure mills have existed for decades, at least as long as the practice of pooling home loans into securities. But in periods of increased foreclosures, the complicated structure of these securities makes it difficult for borrowers who are no longer able to make payments to renegotiate terms, since it is often hard to identify who holds the mortgage notes. Foreclosure mills prey on this chaotic, rapidly moving environment, attempting to hasten foreclosures rather than negotiate refinancing with borrowers' lawyers, a drawn-out procedure that slows down the production line.

In November 2007, a federal judge in Ohio dismissed 14 foreclosure cases brought by Deutsche Bank National Trust Company. Deutsche, which was trustee of a pool of mortgage-backed securities, claimed ownership of mortgages without any proof other than documents showing an intent to convey the loans. Judge Christopher A, Boyko of Federal District Court in Cleveland wrote, "The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliances. Finally put to the test, their weak legal arguments compel the court to stop them at the gate."

The specific complaints against Steven J. Baum, P.C., in Buffalo include filing a claim that a borrower in White Plains, N.Y., was behind in her payments, after ignoring receipts proving the payments had been credited to the borrower's account. Other accusations allege falsely notarized legal documents and foreclosure filings riddled with "a number of glaring discrepancies and unexplained issues of substance," according to a Suffolk County, N.Y., judge who investigated another filing.

Baum, run by the 41-year-old heir to his father's law practice, has around 500 employees and also owns a legal-document processing company. The firm has worked for many of the nation's best-known mortgage lenders, among them Bank of America, Chase, Wells Fargo, HSBC, US Bank, GMAC Mortgage, Deutsche Bank, Sovereign Bank, Citibank, OneWest, M&T Bank, and Bank of New York Mellon.

The U.S. Trustee, part of the Department of Justice, is requesting punitive fines for banks that do business with Baum.

While the law firm has not been found to have committed fraud, it has not been given any awards by the local chamber of commerce, either.

If Lenders Say The Dog Ate Your Mortgage

By Gretchen Morgenson
The New York Times
October 24, 2009

FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests.

But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.

Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.

More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.

The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.

THE case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.

She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.

A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears.

Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case.

"If you want to take someone’s house away, you’d better make sure you have the right to do it," Mr. Shaev said in an interview last week.

In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.

Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.

Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.

Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.

Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount.

John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.

According to a transcript of the Sept. 29 hearing, Mr. DiCaro said: "In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years."

Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. "I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person," he said. "That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage."

Mr. Shaev said he was shocked when the judge expunged the mortgage debt.

"We are in uncharted territory," he said. "Right now I am in bankruptcy court with a house that has no discernible debt on it, yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it."

Among the next steps Mr. Shaev said he would take is to file an amended plan or sue to try to get clear title to the property.

Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before.

Oh, what a tangled web these mortgage lenders weave.

Banks Starting to Walk Away on Foreclosures

By Susan Saulny
New York Times
March 30, 2009

SOUTH BEND, Ind. — Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox.

Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.

So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title — and a world of trouble — in her name.

"I thought, ‘What kind of game is this?’ " Ms. James, 41, said while picking at trash at the house, now so worthless the city plans to demolish it — another bill for which she will be liable.

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

In Ms. James’s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it.

"It is what some of us think is the next wave of the crisis," said Kermit Lind, a clinical professor at the Cleveland-Marshall College of Law and an expert on foreclosure law.

For older industrial cities like South Bend, hard times in the mortgage market began before the recent national downturn, as did the problem of bank walkaways. In the case of Ms. James, a home health care administrator, the foreclosure proceedings began in the summer of 2007, when she could not keep up with the adjustable rate on her mortgage.

In Buffalo, where officials said the problem had reached "epidemic" proportions in recent months, the city sued 37 banks last year, claiming they were responsible for the deterioration of at least 57 abandoned homes; the city chose a sampling of houses to include in the lawsuit, even though the banks had walked away from many more foreclosures. So far, five banks have settled.

In Kansas City, Rachel Foley, a lawyer who handles housing cases, said bank walkaways were "a rare occurrence two to three years ago."

"We’re seeing them dumped more and more at the moment," she said.

Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months.

The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country.

"Oftentimes when the foreclosure starts out, it’s a viable property," Mr. Rothenberg said, "but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times."

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure.

Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter, said some properties had become such liabilities for investors that it was not even worth holding on to them to strip valuable fixtures, like kitchen appliances, toilets and hardware.

"The whole purpose of foreclosure is to take title of the property, sell it and recoup what money you can," Mr. Cecala said. "It’s just a sign of the times that things are so bad no one wants to take possession of the property."

In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline.

The city is hoping to create a new type of legal mediation process that would bring together the homeowners and the mortgage holders to settle their disputes while allowing the owners to remain in the home — considered crucial to any stabilization effort.

"I’d say in the last three or four months, we’ve seen dozens of these cases," said Chuck Leone, the South Bend city attorney. "We see it one of two ways. One is that the bank will simply dismiss the foreclosure complaint. The other is that the mortgage holder will follow through and take a judgment of foreclosure, but then not schedule the property for sheriff’s sale."

In Ms. James’s case, it has been impossible to determine who canceled the sheriff’s sale, since her last mortgage holder went out of business. Even the city clerk’s records did not provide an answer.

"Nobody has any idea who owns what or who’s responsible," said Judy Fox, Ms. James’s lawyer at the Notre Dame Legal Aid Clinic. "It’s a very common story."

Mayor Stephen J. Luecke of South Bend added: "It’s just a crime the way it puts people in limbo. They first off have gone through the grief of losing their house, then they move out and find out that they still own it and have responsibility for it."

In Jacksonville, Fla., Sylvester Kimbrough Jr. found himself caught in the limbo between foreclosure and ownership last year, 10 years into his 30-year mortgage on a $42,000 two-bedroom house.

Mr. Kimbrough, 56, a former driver for a car dealership who is now unemployed, had already moved out when he learned that the foreclosure had been stopped.

"That move really almost destroyed us," Mr. Kimbrough said. "It was all for nothing."

The Welfare King of the 21st Century

By Dean Baker
Truthout | Perspective
March 31, 2008

To help advance his 1980 presidential campaign, Ronald Reagan invented the "welfare queen;" a woman who drove to pick up her check every month in a Cadillac. This mythical figure helped galvanize support among working class whites who felt that their tax dollars were being frittered away on people too lazy to work, most of whom they believed to be black.

There was little truth to the mythology of the welfare queen, the vast majority of welfare stints were always short and were usually the result of family breakups or job loss. Furthermore, welfare never amounted to more than a trivial item in the federal budget, coming in near one percent of total spending. And, most welfare beneficiaries were white. But the welfare queen mythology proved to be an effective political tool, propelling Reagan to an election victory and boosting Republican prospects over the next two decades.

But the old welfare queen mythology has run out of steam. The Republicans are victims of their own success. Welfare rolls have plummeted in the decade following the 1996 welfare reform. Work requirements and harsher qualification rules make it hard to sell the image of a whole class of lazy freeloaders.

If the welfare queen is dead, then it's time to say, "Long live the welfare king." This person really exists, his name is James E. Cayne, and taxpayers just handed him almost $50 million. Mr. Cayne got this gift when J.P. Morgan renegotiated the terms of its takeover of Bear Stearns. The buying price went up fivefold, fetching Bear Stearn's stockholders $1.2 billion instead of the $236 million in the agreement brokered by the Fed last week.

While Bear Stearns shareholders may still have been unhappy about their losses even at the higher price (the stock had been worth more than ten times as much a year earlier), in reality this was a very generous gift from US taxpayers. As an inducement to carry through the takeover, the Fed gave J.P. Morgan up to $30 billion in guarantees, in case the bank has to make good on Bear Stearns' liabilities. In other words, J.P. Morgan is being given the opportunity to do some gambling, with the taxpayers committed to making good any losses. The money that J.P. Morgan paid for this privilege went to Bear Stearns shareholders, not the taxpayers.

James E. Cayne did especially well as a result of the taxpayer's generosity because as the former CEO of Bear Stearns, and current chairman, he owned a great deal of the company's stock. To put the taxpayer's gift to Mr. Cayne in some context, this is approximately equal to the amount paid in TANF to 10,000 working mothers over the course of a year.

Of course Mr. Cayne and the rest of the Bear Stearns stockholders are not the only incredibly rich people benefiting from the taxpayers generosity these days. The Fed's actions are reining down taxpayer money all over Wall Street. When Fed Chairman Ben Bernanke rushed in to save Bear Stearns last week, he made two other important policy changes. He indicated a commitment to protecting other major investment banks and he opened the Fed's discount window to the investment banks. These are both huge taxpayer subsidies to these titans of free market capitalism.

The story of the discount window is straightforward. The Fed is allowing investment banks, which are subject to none of the restrictions or disclosure requirements of commercial banks, to borrow at a government subsidized interest rate. Currently the discount rate is two-and-a-half percent. Those seeking to refinance mortgages, most of whom are probably better credit risks these days than the investment banks, may want to call Mr. Bernanke and ask for the same deal.

While the subsidy involved in the below market lending is easy to see, the commitment to support the investment banks is probably the bigger subsidy to the Wall Street crew. The basic story here is that the investment banks made commitments, mostly in the form of credit default swaps, that they lack the resources to honor. These credit default swaps are essentially a form of insurance. The investment banks promise to make payments to bondholders in the event that there is a default on the bonds they hold.

The banks were prepared to deal with an occasion default, but they don't have the resources to deal with the sort of large-scale collapse that we are now witnessing as a result of the bursting of the housing bubble. Mr. Bernanke has effectively told the banks' creditors not to worry, because the Fed will make good on these credit default swaps, even if Bear Stearns, Lehman Brothers, or Goldman Sachs can't.

This is a very nice deal for the investment banks, because they got the fees for selling the credit default swaps, not the Fed. And they were very big fees, making the banks and the bank's executives extremely wealthy. In effect, the investment banks sold insurance that they actually were not in a position to provide. Instead the Fed is providing the insurance, but the investment banks get to keep the money they got from selling the insurance: nice work, if you can get it.

This is yet another episode of the Conservative Nanny State, the story of the how the government intervenes in the market to redistribute income from those at the middle and bottom to those at the top. In this case, the media would have us applaud Mr. Bernanke and the Fed for keeping the financial system from freezing up and preventing the economic chaos that would follow.

While the Fed deserves some credit for preventing worse financial distress in the face of the collapsing housing bubble, government handouts for the very richest people in the country are difficult to justify. In other areas, we usually expect to see some quid pro quo, for example, serious regulations on lending and perhaps restrictions to accomplish social goals, like a cap on executive compensation ($1 million a year should attract a much more competent crew). This is welfare as we know it now.

Predatory Lenders' Partner in Crime
How the Bush Administration Stopped
the States From Stepping In to Help Consumers

By Eliot Spitzer
Washington Post
February 14, 2008

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York's, enacted laws aimed at curbing such practices.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

Foreclosure Auctions Clog the Courts

By Monica Hatcher
The Miami Herald
February 7, 2008 i

A flood of foreclosures has forced county offices in Miami-Dade and Broward counties to expand their services to handle the load.

With more than 1,000 foreclosed homes ready to hit the auction block in February, the Miami-Dade County Clerk's office is increasing the number of days it hold auctions from two to three per week.

''We've been running into some serious problems,'' said Michael Henderson, a spokesman for the Miami-Dade clerk. ``We've needed an extra day for a couple of months now.''

In Broward County, clerks also are discussing adding an extra auction day to alleviate the backlog of filings.

The Broward court is now asking lenders and banks to agree to extend sale dates by nearly a month.

So far, that seems to be working, said Barbara Brown, court operations manager for the Broward Circuit, Civil and Family courts.

As more homeowners and investors succumb to spiking mortgage payments, the number of properties scheduled for auction -- the last step of a lengthy legal process in which a lender either sells or regains title to a property -- nearly tripled from 2006 to 10,209 in 2007 -- plus another 1,467 in January, according to Foreclosure Information Systems, a Miami data services company.

If recent foreclosure filings are any indication, the numbers will continue to swell. Lenders opened foreclosure cases on some 8,829 home loans in Miami-Dade County in the fourth quarter of 2007, and 10,207 in Broward. Another 3,247 cases were filed in Broward in January.

The figures represent part of the rolling tsunami of troubled home loans nationwide that continues to wreak havoc among the country's biggest financial institutions. Record defaults are being blamed for touching off a probable recession, as lenders tighten standards for doling out the credit that fuels the U.S. economy.

The foreclosure auction represents a lender's final attempt to recover at least a portion of the amount loaned on a home, before taking the property back.

Clerks locally said they are grappling with an ever-growing load of new cases.

''It's never been like this, not for as long as I can remember,'' Brown said.

She pointed out the Broward court has been auctioning about 240 properties per week since January, up from about 30 or 40 per week the same month last year.

The extra auction day in Miami-Dade is expected to be added starting in March, most likely on Fridays.

Henderson said the office was trying to find the resources to pay staff and make other arrangements for the change. Right now the office is having to pay employees costly overtime.

The rationale for adding an auction day was rooted mainly in concern for investors, Henderson said. Winning bidders must pay the full auction price for their purchases in cash by 3 p.m.

With auctions running later than usual, Julian Dominguez Jr., president of Foreclosure Information Systems and an investor, said the 3 p.m. deadline gives buyers -- who must put at least make a 5 percent nonrefundable deposit upon winning a bid -- a mere 90 minutes to get to the bank and return with the difference.

''It'll make you nervous. If you've ever gone to the bank to have a cashier's check made, you might get there and there's 20 people in front of you,'' Dominguez said. ``By the time you're out of there with your check, you're stressed.''

Dominguez added that more than 95 percent of the properties for sale were being bought back by lenders.

Lawsuits Rising as Preconstruction Buyers
Want out in Depressed Market

By Katy Bishop
Naples Daily News
February 2, 2008

They signed for homes costing hundreds of thousands of dollars two years ago, and then the market went bust.

Now, the homes aren’t worth the purchase price anymore and the credit crunch has made financing harder to get.

Buyers who signed contracts for pre-construction condos and homes in the booming market are suing developers under a federal statute to avoid closing and to get their deposits back. Others are just walking away from the deposits, usually about 20 percent of the purchase price.

"Buyers want out ... because the economy is bad," said Richard Inglis, a lawyer with Fort Myers-based Phoenix Law Partners, who has handled many such cases. "It’s hard to think about buying a second home if you’re laid off or if your economic situation has changed substantially, ... especially in Southwest Florida where we’re selling make-believe and sunshine."

Dozens of lawsuits have been filed in state and federal courts citing the federal Interstate Land Sales Full Disclosure Act.

Those suits include more than 40 against The Residences at Coconut Point in Estero and other suits for properties in WCI Communities developments, Summit Place and Lely Resort Golf & Country Club in Naples, Bell Tower Park in Fort Myers and North Star Yacht Club in North Fort Myers.

"Because the statute is complicated a lot of people don’t understand it, and they really have no grasp that they even have rights," Inglis said. "There’s nothing in the contract that would alert them to it."

But the word is getting out and buyers are hiring lawyers to study their contracts.

In 2007, Inglis wrote about 50 letters to developers citing the act and filed about 15 lawsuits.

"Two and a half years ago, it was just the opposite," Inglis said. "It was developers trying to get out of deals and stiffing customers because they wanted to sell (the homes) for more. It’s so incredible what a sea change there has been."

The act requires developers who market 100 or more homes in one promotional scheme to register with the government and follow a prescribed procedure with buyers, including providing a property report at the time the contract is signed.

If the developer wants to avoid registering with the government, they must qualify for an exemption. One of the most common exemptions for a developer is the two-year exemption, which requires that the developer’s contract promise to complete the project within two years.

But if the contract doesn’t promise unconditionally that the project will be completed within two years or if the developer doesn’t finish the project within that time, that exemption is invalidated, attorneys explained. That means the developer is in violation of the federal act’s requirements and the buyer can fight the contract and get their deposit back, along with damages in some cases.

Massachusetts residents Peter and Nancy Collins filed suit against Stock Development in September 2007 alleging violation of the federal act.

The Collinses signed a contract in February 2005 to buy a home for $659,990 at Lely Resort Golf & Country Club in Naples. They put down a deposit of about 25 percent — more than $165,000.

Their case alleges that Stock Development attempted to exempt the project from the act by promising to complete the home within two years, but in another part of the contract it put conditions on that promise, thus violating the act.

Because Stock didn’t qualify for the exemption, it should have followed procedure and given the Collinses a property report, among other requirements, the lawsuit contends.

The lawsuit says because that didn’t happen, Stock has violated the federal statute and the Collinses are seeking attorney fees, damages and their deposit back.

Their attorney declined to comment on the case for this story and advised the Collinses not to comment because the case is still open.

In its counterclaim, Stock Development denies that the federal act applies and accuses the Collinses of being "investors purchasing the home on a speculative basis."

Deborah Rardin, a Lee County resident, filed a similar suit against Kosene & Kosene, developer of The Residences at Coconut Point.

Rardin signed a contract for a $333,500 condo in December 2005, and paid $68,300 in deposits. Two years later, she filed a lawsuit in federal court to cancel her contract under the federal act and Florida condominium law.

Rardin’s complaint argues that the contract’s two-year promise wasn’t unconditional so the developer didn’t qualify for the exemption and should have provided a property report, among other requirements.

She also alleges that they didn’t complete construction within the promised two-year time period.

In their answer, the developer denies the allegations and argues that Rardin didn’t comply with the contract.

Rardin’s lawyer declined comment on her behalf because the case is still open.

Very few developers actually register with the government, and most find a way to fit their project into one of the federal statute’s exemptions, said Doug Wood, an attorney with Siesky, Pilon & Wood in Naples.

"But then the question becomes: Did they actually comply?" he added.

Wood has worked on about 15 cases dealing with the federal land sales act in the past year, he said.

Most of the people weren’t investors, he added, but people who were purchasing for themselves, at both the high and low ends of the market.

There are also cases where the property is not completed within the two-year timeframe required by the federal law, and so the buyer has the right to contest the contract.

The U.S. Department of Housing and Urban Development, which handles the Interstate Land Sales Full Disclosure Act, "has received a considerable amount of complaints involving developers’ failure to complete (homes) within two years," HUD spokesman Brian Sullivan said.

Most of those complaints are coming from people who purchased property in Florida, he added.

Lisa Barnett, a real estate attorney with Cheffy Passidomo Wilson & Johnson in Naples, has seen a recent increase in people trying to get out of pre-construction contracts, she said.

Barnett’s clients are usually the developers, she said, but she declined to identify them.

"In most circumstances these buyers don’t have a legitimate reason not to close, so they’re left with a choice of signing and carrying it, if they have the financial ability ... or walking away from their deposit," she said. "We’ve only had a handful that get as far as a lawsuit."

Buyers who purchased homes and condos from the high $100,000s to the $900,000s are backing out of contracts and walking away from deposits or filing lawsuits, Barnett said.

The higher-end market, $1 million and up, hasn’t been affected as much.

"Obviously when the market’s going up these problems aren’t exposed, because if somebody walks away from a contract the developer says, ‘Great, I can sell it for more,’" Inglis said. "Now the market constrains tremendously."

Poor Poorly Served in Home Loss

By David Hunt
The Florida Times-Union
January 29, 2008

Six hundred Jacksonville families are being evicted from their homes every month, a statistic that the head of Jacksonville Area Legal Aid said likely will get worse.
Executive Director Michael Figgins' comments came during an informal roundtable Monday on the subprime mortgage market collapse and what appears to be turning into a foreclosure crisis.

City officials met with lawyers and Florida Chief Financial Officer Alex Sink during the meeting.

Figgins said unlike in the criminal justice system, people going through foreclosure aren't entitled to an attorney, meaning if they can't afford one, they go in ill-equipped to keep their home.

"The outcome is lopsided justice," he said.

Some ideas floated during Monday's meeting include calling for a foreclosure moratorium statewide, publishing foreclosure help information on city buses and adding lessons about home purchases to city school classes.

Last year, Figgins said his agency had to turn down 75 percent of qualified applicants because of short-staffing. Still, his attorneys and legal assistants handled 300 foreclosure cases.

The firm specializes in helping low-income people resolve legal issues in civil court.

Sink said the subprime market, "was built on a house of cards, helping people believe artificially low rates would help them buy bigger homes."

She said the resulting foreclosures have been a complicated problem throughout the state.

"Florida's history has been built on booms and busts in real estate, but this time, it's different," Sink said.

Fund Frozen, Florida Towns Feel the Pinch

By Kirk Semple and Mary Williams Walsh
The New York Times
January 1, 2008

PORT ST. LUCIE, Fla. — On Nov. 28, Marcia L. Dedert, finance director of this rapidly growing city, called the administrators of Florida’s state-run investment pool to ask whether it was still safe to park her city’s money there. She was hearing talk of urgent withdrawals by others worried about the pool’s investments in debt related to subprime mortgages.

After the pool’s manager told her the money would be all right, Ms. Dedert recalled, she deposited $135 million in bond proceeds. But less than 24 hours later, the administrators froze the pool and blocked withdrawals to halt a full-blown run.

Now the city cannot touch the money. And rest of the $371 million it has in the pool is also off-limits unless the city pays a 2 percent penalty.

Port St. Lucie is among hundreds of local governments in Florida that were drawn to the pool by its air of reliability and the promise of higher returns than banks offered. They now find themselves grappling with the consequences of having their money frozen.

Some have had to borrow money to meet day-to-day obligations. Others have had to shift money around for the time being or consider postponing long-planned projects.

For Port St. Lucie, the timing of the freeze could not have been worse. The city is trying to recreate itself as a center of the biotech industry and had just issued $155 million worth of bonds to lay roads, water pipes and sewer lines in a planned "jobs corridor," where it hopes to house the companies it is courting from out of state.

"These are projects that we can’t afford to stop dead in their tracks," Mayor Patricia P. Christensen said.

The pool’s managers said they had been compelled to freeze the pool to save it. Until the run, it was the largest of more than 100 such pools around the country, with $32 billion in investments. Because of withdrawals, it now has about $14 billion.

The pool has not suffered any actual losses on its investments in securities tied to subprime mortgages because it has not sold them. While it is unclear how much money, if any, the fund may lose from subprime investments, state officials say they have quarantined over $2 billion in assets from the fund because they no longer meet the pool’s investment guidelines or have some other problem.

The state has hired an interim investment manager to restore stability to the pool, and Gov. Charlie Crist has called for a review of the pool’s operations by outside lawyers.

The problems rippling out from the investment fund are the latest in a series of economic setbacks for Florida, which is already coping with a weakening housing market and slowing population growth.

The economic malaise forced lawmakers in the fall to trim $1.1 billion from the state’s $71 billion budget, and economists are predicting that the state might have to cut an additional $2.5 billion over the next 18 months. Given those cutbacks, local officials said they do not expect the state to bail out the investment pool, meaning they are likely to bear the losses.

None said they were facing imminent financial collapse. Mercifully, the freeze occurred just as end-of-the-year property tax revenues were starting to come in. But officials in many places said they were still scrambling for alternative sources of cash for the coming months — and burning with indignation at officials in Tallahassee, the state capital.

"I get the impression that they don’t see this as the taxpayers’ money," Mayor Christensen said of the State Board of Administration, which operates the pool, along with Florida’s $140 billion pension fund and more than two dozen other big blocks of public money. The three-member board consists of the governor, the treasurer and the attorney general.

The chief financial officer of the Leon County school district, Merrill Wimberley, said he was in the hospital recovering from surgery on the day of the freeze and was shocked to emerge and find the district’s $46 million out of reach.

"I tell you, I felt like Rip Van Winkle," Mr. Wimberley said. The school district had to borrow $10 million the same day to pay its 4,600 teachers and other staff members, a costly stopgap.

"We don’t relish the thought of having to pay $13,000 in interest," Mr. Wimberley said.

Leslie Rocha, who oversees finances for the small town of Oakland, said that with the freeze, her town had to shift money from other sources to cover a bond payment of about $200,000 for a new school. "It’s even a bigger burden since we’re so tiny," Ms. Rocha said.

Hillsborough County left $871 million in the pool, fearing it would worsen the run if it withdrew such a big amount. Its comptroller, Pat Frank, said that the county could tap reserves elsewhere for the time being, but that its budget would go out of balance because the pool had stopped paying interest on the frozen money.

Many officials said they believed they could get through the coming months but were bracing for crippling shortfalls should the pool remain frozen well into 2008, as they expected.

Ms. Dedert, the Port St. Lucie finance director, said that by revising the budget and realigning sources of money and payments, the city would stay ahead of its bills for the next few months. But unless the restrictions on the money in the pool are loosened, she said, the city will run out of cash by summer.

"June 1 is when I start crying," she said. At that point, she said, the city would be forced to consider borrowing money or paying the 2 percent penalty for withdrawals.

Many local officials expressed outrage at the penalty. They said they were duty-bound to protect their communities’ principal and resented being expected to pay for what they consider inappropriate risk-taking at the state level.

"I can’t afford a mistake with the public’s money," said Monti Larsen, chief operations officer for the Children’s Services Council of Broward County, which has $17 million frozen in the fund.

This is not the first time the State Board of Administration has had to explain unusual investment losses. After the collapse of Enron in 2002, it came to light that the state pension fund had acquired big blocks of Enron stock just as other investors were dumping it. The fund lost $280 million.

Coleman Stipanovich, then the board’s deputy executive director, blamed an outside investment adviser, Alliance Capital Management. "We didn’t understand why they were buying it," he told a Congressional hearing. "Even my mother was watching on TV and knew about Enron."

Now angry depositors are asking much the same questions about Mr. Stipanovich, who was promoted to executive director in 2002 by then-Gov. Jeb Bush, and who worked closely with Lehman Brothers, the firm that sold Florida more of the subprime-tainted securities than any other firm.

Some of the purchases were in July and August, after the risks of subprime-mortgage related securities were widely known and most investors were shunning them. The timing of Florida’s purchases was first reported by Bloomberg News Service.

Mr. Stipanovich resigned on Dec. 4 and has declined to discuss his decisions.

Some local officials said in interviews that they were also eager to learn what role Mr. Bush might have played. A month after finishing his second term as governor last January, he formed a consulting firm, which in June was engaged by Lehman Brothers. Mr. Bush also sits on the board of Lehman Brothers’s private equity unit.

Spokesmen for Mr. Bush and Lehman Brothers said Mr. Bush’s consulting work had nothing to do with the sales of the securities to the Florida investment pool.

The State Board of Administration has begun an investigation of the pool’s internal decision-making. The inspectors general of the governor, the treasurer and the attorney general have said they intend to hire outside lawyers and auditors to conduct the investigation.

Government investment pools operate much like money-market mutual funds, but they are specifically exempted from the federal laws that cover mutual funds.

The last time such a pool made headlines was in 1994, when one in Orange County, Calif., blew up, causing the county to file for bankruptcy. The disaster set off talk of whether the pools should be subject to federal regulation. But the idea faded after state and local officials promised reforms.

Now local officials in Florida are again wondering whether self-regulation is adequate, and whether federal oversight might be better.

Florida is not the only government investment pool to have acquired assets linked to subprime mortgages, but it is the only one to have suffered a run, for reasons unlikely to be clear until the investigation is completed.

Nor did Florida’s pool officials move swiftly to stem the withdrawals. After the Orange County debacle, some governments imposed restrictions on withdrawals. Arizona, for example, requires five days’ notice for withdrawals over $10 million. But Florida did not have any such restrictions.

Calls for accountability are particularly loud in Port St. Lucie.

City officials are pressing for a federal investigation into the state’s handling of the fund and what they regard as deception in the advice they say Ms. Dedert received from Michael Lombardi, the pool’s manager, to deposit the $135 million. "He assured me that it was solid," she said.

Roger Orr, the city attorney, said, "It’s bad faith at best and fraud at worst."

But Michael McCauley, senior corporate governance officer for the State Board of Administration, said there had been no discussion about freezing withdrawals until an emergency board meeting at midday Nov. 29.

"We had no idea it was going to be frozen," Mr. McCauley said in a telephone interview. The board members decided to act after a morning of enormous withdrawals.

"It was a particularly bad day," Mr. McCauley said.

Kirk Semple reported from Port St. Lucie, and Mary Williams Walsh from New York.

http://www.nytimes.com/2008/01/01/us/01pool.html

Subprime Satan in Hedge Fund Hell

John Crudele
New York Post
December 27, 2007

MOVE over, banks, it's time for hedge funds to worry about subprime loans and such.

"They haven't been under the same pressure as public companies to own up" to problems, said Chris Whalen, who runs The Institutional Risk Analyst newsletter.

But with the year's end upon us, the hedgies will now be 'fessing up and reporting problems to clients.

And Whalen thinks hedge funds could have much greater susceptibility to bad derivatives than the banks that have been hogging the headlines these past few months.

In fact, some hedge funds could be at the mercy of the hemorrhaging financial institutions that sold them the derivatives.

Hedge funds could have 70 cents of every $1 of derivative securities sitting on their books. The 30 cents remaining on the books of Wall Street institutions in many cases represent just the remnants of unsold securities.

You might have noticed that Wall Street firms have been taking billions in write-offs for bad loans in the past six months.

As I've written before, part of the reason for these huge hits is that banks - which often own brokerage firms - can no longer absolve their outside auditors of mistakes. As such, auditing firms have probably been playing hardball with write-offs.

Will financial institutions be equally hard on the hedge funds that bought derivatives from them?

I don't know. But "if the broker tells a hedge fund to write it off, the hedge fund is dead," Whalen said.

Subprime Mortgage Probes Face Big Hurdles
Scrutiny Grows, but Banks' Liability Remains Unclear

By Carrie Johnson
Washington Post
December 27, 2007

The nation's largest banks are losing billions of dollars from the mortgage debacle. But will pain from bad housing bets be compounded by government investigations?

As credit woes sparked by the troubled housing market threaten the broader economy, investigators are trying to determine whether Wall Street investment banks bundled risky loans with good ones without properly disclosing such risk to investors.

Law enforcement officials including those at the Justice Department, the Securities and Exchange Commission and the New York attorney general's office are scrutinizing whether banks and mortgage lenders helped fuel the crisis by misleading investors about dicey housing assets and then covered up losses when the markets turned sour. Government subpoenas are flying, investor lawsuits are mounting, and in the nastiest cases, businesses are pointing the finger of blame at one another.

The tangled system of bank regulation and the challenge of proving that executives intended to break the law when they unloaded bum assets could pose significant hurdles for investigators, current and former government officials say. Many of the assets that tumbled were explicitly marketed as involving borrowers with troubled credit histories, alerting investors that they were high-risk bets.

This complexity means investigators are searching for e-mails or witnesses to show that companies knew about the problems and failed to disclose them. Defense lawyers say that without such witnesses or documents, proving cases will be difficult.

"Just because you have a business reversal doesn't mean there's a basis for a government investigation," said Robert J. Giuffra Jr., a New York securities defense lawyer. "The kinds of things we're talking about here turn on valuation judgments and market forces. This is not the stuff of a securities fraud case."

Focus on small-scale housing swindles
The FBI and criminal prosecutors have focused on small-scale, localized housing swindles that involve phony paperwork and inflated valuations of a single home or group of nearby properties. Last week, the U.S. attorney in Miami filed charges against what he called a fraud ring of more than 30 brokers, sellers and appraisers who allegedly agreed to buy and sell homes at inflated prices. In California, also last week, a former broker pleaded guilty to accepting payoffs for approving questionable loans with phony paperwork.

The legal jeopardy of the market's biggest actors, however, remains unclear even as scrutiny of their activities has intensified.

The SEC, which is responsible for policing the stock market, is probing whether Merrill Lynch and a handful of other large investment banks and brokerages properly disclosed losses and financial problems in the weeks before Merrill's chief executive retired under pressure in October. Merrill's estimated losses ballooned from nearly $5 billion to almost $8 billion in just three weeks earlier this year, and stock analysts have asked how the problems could have gotten so far out of line without the knowledge of Merrill's top managers. A Merrill Lynch spokesman said the company is cooperating with the SEC probe.

Meanwhile, the U.S. attorney in Brooklyn is looking into last summer's precipitous collapse of two Bear Stearns investment funds, as well as whether former fund managers may have taken advantage of early warnings to transfer millions of dollars of their own money out of the deteriorating accounts and into more stable investments.

Bear Stearns has also been sued by authorities in Massachusetts and by Barclays Bank, which slapped it with a civil fraud lawsuit last week for allegedly misrepresenting the health of a hedge fund and reassuring Barclays investors that all was well in the months before the fund's June collapse.

Bear Sterns called the lawsuit "unjustified and without merit" in a statement. In a defense likely to be echoed by other financial institutions under scrutiny, Bear Stearns said its clients were sophisticated and made their own assessments after fully digesting the risks and rewards of such an investment without anticipating "what, in hindsight, turned out to be a historically difficult market."

The SEC has opened more than two dozen investigations into how companies are valuing their mortgage investments, whether businesses downplayed losses and whether executives may have sold stock when they secretly knew that problems had emerged. Regulators underscored their concern this month by sending a letter to banks and insurance companies that, in essence, reminded them to be honest with investors about looming financial troubles .

Banks as victims?
Lawyers who have analyzed scandals involving savings and loans, stock option awards and arcane accounting issues say that businesses can shield themselves by arguing they relied on advice from accountants and lawyers. In some cases, the banks can claim they were victims of the same bad judgments that are hurting ordinary investors.

"This is one of those situations, kind of like the Internet bubble, where everybody and his brother guessed wrong," said Jonathan Dickey, whose firm defends companies, including Freddie Mac, against government investigations and investor lawsuits. "There are going to be very strong and powerful defenses that most of these firms are going to have."

Armed with far-reaching state laws that prohibit deceptive business conduct, New York Attorney General Andrew M. Cuomo may have the lowest legal bar to proceed against financial institutions for their role in packaging suspect mortgage loans and selling them. Through a spokesman, Cuomo, who has issued subpoenas to Merrill and Deutsche Bank, among others, declined to comment on the progress of his investigation. Deutsche Bank did not return calls.

Lawyers who have worked with Cuomo, a former Housing and Urban Development secretary, in probes involving the student loan industry suggested that he might be more interested in reaching quick settlements in which companies promise to change their behavior rather than waging a costly, time-consuming court fight. Cuomo's ambitions may be fenced in, in part, by an appeals court ruling this month that limits his authority to pursue lending violations by national banks.

That means a patchwork of regulators including the SEC and the Office of Thrift Supervision, which oversees savings and loans, are taking the lead in looking at activities of Washington Mutual, whose home-lending and appraisal practices have come to Cuomo's attention. Washington Mutual said it is taking the government inquiries seriously and will cooperate with authorities.

Another open question, current and former regulators said, is how the U.S. Supreme Court will rule in a major securities lawsuit that could determine whether investors can sue third parties for their role in financial frauds. Industry groups are seeking to limit shareholders' power in such cases, which could bar the courthouse door to plaintiffs suing credit-rating agencies, investment banks and accountants and law firms that may have helped clients disguise housing-related losses. A ruling is expected by summer.

31 Arrested in Mortgage Fraud Scheme By Matthew Haggman Miami Herald December 18, 2007 Federal prosecutors charged 31 defendants in a multimillion-dollar mortgage scam that stretched from Miami to Marco Island, two weeks after Miami-Dade County officials announced its own round of arrests for alleged home loan fraud. The indictment unsealed Monday alleges that a U.S. Attorney Alexander Acosta discusses the alleged mortgage  fraud scheme. Federal charges have been brought against 31 people in South Florida. Audio | U.S. Attorney explains how the alleged mortgage schemes worked and why they should not be ignored Video | U.S. Attorney discusses charges Document | Read the indictment Miami couple, Juan and Rachael Torrens, led a fraud ring that would overstate the sale price of a home, get a loan for the bigger amount and then pocket the difference between the loan and the true sale amount. The arrests come as law enforcement officials continue efforts to rein in rampant mortgage fraud throughout Florida. Fannie Mae has said the state led the nation in mortgage fraud, with the highest rate in South Florida. In September both U.S. Attorney R. Alexander Acosta and Miami-Dade County Mayor Carlos Alvarez announced separate task forces targeting mortgage-fraud scam artists. Mortgage fraud comes in all kinds: inflating home values to rip off lenders, charging outsized transaction fees to distressed homeowners facing foreclosure, and more. Often the fraud includes people at each step of the home financing process -- the buyer, appraiser, broker, lawyer, lender and title examiner. Prosecutors allege that was the case with the Torrenses. Also charged as accomplices were a Palmetto Bay appraiser, the boss of a title firm in Hollywood and an assistant branch manager at Regions Bank's Country Walk location. A slew of ''straw buyers'' who lent their name and credit to deals for a fee were also charged. The Torrenses would then keep the mortgage current until the homes could be resold again, often to a fake straw buyer, prosecutors allege. When the couple failed to make mortgage payments, some properties went into foreclosure, resulting in big losses to the lender. The group carried out its scheme at about 28 properties with loans of about $14 million, the government alleges. Locations include Oakland Park and Dania Beach, but the bulk were in Marco Island. Acosta declined to say how much money the defendants were able to wrest out of each deal, but said it was enough to pay all the co-conspirators a fee and still retain a profit. ''Mortgage fraud is a real and daily threat to our most important assets -- our homes,'' said Acosta. He pledged to bring more indictments, but said such cases are time-consuming because many of the frauds are so complex. ''It's not like you find someone with drugs in their pocket,'' he said. Since announcing the Federal-State Mortgage Fraud Initiative three months ago, federal prosecutors in South Florida have charged a total of 55 defendants involving fraudulent loans valued at more than $75 million. Many of the cases are still pending. Last week, Felipe Nunez pleaded guilty to one count of money laundering. Nunez was one of 15 defendants charged Sept. 27 for mortgage fraud in Southwest Ranches by federal officials. Meanwhile, Miami-Dade County's Mortgage Fraud Task Force has made 18 arrests in the last three months. That anti-fraud group includes lawmakers, law enforcement and business leaders. It's charged with not only nabbing offenders but also figuring out ways to combat mortgage fraud. The county task force, for instance, has developed a uniform mortgage fraud complaint form in an effort to be a clearinghouse for complaints and developed a model code of conduct for industry professionals. It's also proposing legislation that would allow appraisers to redo assessments for dwellings in neighborhoods hit hard by fraud. In such places, fraudulently inflated values may skew price comparisons and unfairly boost property taxes. Acosta said the two anti-fraud efforts don't overlap. ''Our law enforcement partners at the federal and state level are experienced at preventing overlap,'' Acosta said at a Monday afternoon news conference. ``Our task force is strictly law enforcement, not seeking regulatory or legislative changes. That makes our task force more narrow.'' Complaint: http://media.miamiherald.com/smedia/2007/12/17/20/fraud.source.prod_affiliate.56.pdf

As Owners Feel Mortgage Pain, So Do Renters

By John Leland
The New York Times
November 18, 2007

Foreclosures Hit a Snag for Lenders

By Gretchen Morgenson
New York Times
November 15, 2007

A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.

Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.

The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.

But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.

Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.

The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.

On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.

Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: "The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate."

A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.

"This is the miracle of not having securities mapped to the underlying loans," said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. "There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools."

The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.

Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.

"The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized," said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. "A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101."

When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.

Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.

Borrower advocates cheered Judge Boyko’s ruling.

The plaintiff’s argument that "‘Judge, you just don’t understand how things work,’" the judge wrote, "reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process." The cases could be filed again in state court, however.

April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.

"We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply," Ms. Charney said. "Hopefully this will convince everybody that the time to work out these home loans is now."

http://www.nytimes.com/2007/11/15/business/15lend.html?ei=5065&en=09648bf21e15f1a5&ex=
1195794000&partner=MYWAY&pagewanted=print

Cuomo Accuses Appraiser of Inflating Home Values

By Noelle Knox
USA TODAY
November 1, 2007

New York Attorney General Andrew Cuomo sued a major appraisal company Thursday, saying it helped Washington Mutual (WM) inflate home appraisals as part of what Cuomo called a nationwide pandemic that's contributed to the housing recession.

Cuomo produced copies of recent e-mails among top executives of Washington Mutual, the nation's largest savings and loan; First American; and First American's appraisal subsidiary, eAppraiseIT.

He alleges that executives of First American (FAF) and eAppraiseIT "caved to pressure from Washington Mutual" to use preferred appraisers who would inflate home values.

Cuomo said the case is "emblematic of systemic industrywide fraud."

Though his case covers only appraisals in New York, other states have seen similar problems. Last month, California enacted a law barring anyone in a real estate sale from inappropriately influencing the appraiser. Similar bills have passed in Colorado, Iowa and Ohio.

Terry Dunkin, president of the Appraisal Institute, agreed that the problem is pervasive, saying, "Pressure on appraisers to come up with valuations that make the deal work is an issue across the country."

A startling 90% of appraisers surveyed last year by October Research said they felt "pressure (often from lenders, brokers or real estate agents) to overstate property values in greater than half of their appraisals," up from just 55% of appraisers in 2003. And three-fourths of the respondents said they weren't paid or lost business if they refused to inflate values. The most recent survey had more than 1,200 respondents, with a margin of error of 2.8 percentage points.

A lender hires an appraiser to ensure that a property is worth what the buyer is paying. The lender needs to know that if the buyer defaults, the home can be resold for enough money to repay the loan.

But as banks and lenders loosened their criteria for borrowers to show proof of income, Cuomo says, the mortgage industry pushed appraisers to produce "the right number" to back the value of the loans.

First American, which also spoke for its subsidiary, said the lawsuit "has no foundation in fact or law" and was based on "a handful of e-mails that have been taken out of context or mischaracterized."

Washington Mutual said it was "surprised and disappointed by the allegations" and was suspending its relationship with eAppraiseIT.

Washington Mutual wasn't named as a defendant, Cuomo said, because he has limited jurisdiction over the federally chartered lender. The federal Office of Thrift Supervision, which oversees S&Ls, says it's "reviewing the case."

http://www.usatoday.com/money/economy/housing/2007-11-01-cumo-appraiser_N.htm
 

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