Following the announcement by Ally Financial (f/k/a GMAC Mortgage) that it will stop foreclosure proceedings as they sort out their issue of filing improper affidavits, the Florida top court is being ‘asked’ to halt around 80 percent of all foreclosures in the Sunshine State. At issue are the practices of three law firms that have been operating as “foreclosure mills” for servicers. At risk are thousands of final judgments that could be reopened.
U.S. Rep. Alan Grayson (D-Fla.) has asked that the Florida Supreme Court halt foreclosures being handled by the law offices of David J. Stern, Marshall C. Watson, and Shapiro & Fishman. These three major law firms are currently under investigation by the Florida Attorney General over questions about slipshod paperwork practices involving thousands of cases.
The effect of this on securitizations, which could be tied up in court for years, is the possible waterfall impact if the foreclosures are reversed. If the foreclosure is deemed invalid, and the subsequent liquidation of the property following conversion to REO is voided, query whether the trust can seek to have the money previously paid out “clawed back” from investors –say by an off-set to future payments. And what about the write-downs and write offs of mezzanine and sub-bonds that took the Realized Loss upon liquidation.
Given that this is such a mess, it is unlikely that the Court’s will unwind all effected foreclosures. The size of the issue, given that a significant portfolio of loans in the subprime world came out of Florida, would be too dramatic on an already weak financial market. More likely, the Courts will punish the culprits. However, since the three law firms will not be able to withstand the legal liability if found guilty, servicers may also be dragged in for not properly managing the outsourced relationships. Legal liability could attached to the servicers under a negligence standard. Servicers could also be hit with a double whammy if any reversal of a foreclosure could require that the servicer mayd also have to return any reimbursement moneys out of the REO sale proceeds. That would clearly hit their bottom line hard.
Liability insurance providers, specifically E&O issuers for the servicers, as well as the malpractice insurance providers for the three law firms, better start reserving against this exposure, if they can. Exposure could be in the hundreds of millions, if not billions.
And all of this, from the State that gave us the great “chad” issue. I guess doing something properly is not in the nature of some Floridians. Must be all that sunshine.
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