FROM THE MOUTHS OF BABES – THE DEPOSITION OF A STERN’S PARALEGAL

In what appears to be ground zero in the robo-foreclosure mess, the September 23 deposition of Tannic Lou Kapusta, a senior paralegal with the Law Office of David Stern, enlightens us as to the tsunami now reaching the shore. The Law Firm of David Stern, for those of you not following this issue, is in the center of the foreclosure hurricane, having been under investigation in Florida for running one of the largest foreclosure mills in the country. Reports have this law firm having handled foreclosure actions for everyone from Fannie Mae and Freddie Mac to Aurora (Lehman), Citi, GMAC and most of the major servicer.

I have been referring to the issue as robo-foreclosure, and not robo-signing, as referenced in the media, because of an understanding that this issue dealt with more than the execution of the affidavit, but rather related to the entire process of the foreclosure. This deposition by the Office of the Attorney General for the State of Florida of a senior paralegal for one of the largest foreclosure mills in the country makes it clear the signing of affidavits is only one of lesser failures in the process. This is why servicers like BofA, now awakened after being caught sleeping at the switch, are putting on the brakes in a desperate move to prevent the oncoming train-wreck.

With a staff of approximately 1100, the David Stern Law firm was international, preparing the foreclosure paperwork in Guam and the Philippines. This senior paralegal, claiming personal responsibility for 1200 files including those of Fannie Mae and Freddie Mac, stated on the record that not only were the affidavits prepared in an automated process called CASEUM, but the automatons walking around the office did not know what they were doing, or that what they were doing was at least improper and more likely, illegal. The paralegal went on to state that in-house lawyers for the firm, as well as paralegal, were enslaved to the law firm and knew of the improprieties and illegalities but feared the loss of their job over the loss of their license to practice.
Examples of what was being done at this mega-paralegal shop included:
• Use of floating notary stamps by non-notaries


• Notarizations done not in the presence of an authorized notary


• Notarizations being done before the signature


• Execution of affidavits by employees of The Law Firm of David Stern under presumed powers of attorney for the servicer/mortgage holder


• Employees of The Law Firm of David Stern signing the signature of the person who presumably had a power of attorney to sign on behalf of the servicer/mortgage holder


• “Sewer service” by a captured process servicing group


• Preparation and execution of assignment of mortgage after filing of the lis pendent and even following the actual foreclosure


• Falsifying information, including Unpaid Principal Balance, on affidavits


• Fraudulently stating or changing dates on documents to make them comply with legal requirements


• Multiple improper charges for service of process billed to the servicers


• Questionable relationship with a the court in a certain county in Florida, with the court hearing 500 foreclosure cases in a day

If this is indicative of the level of impropriety within the foreclosure process, we are in for a nuclear winter. While it appeared initially that prior foreclosures would not be reversed, now it appears from this deposition that such may not be the case. If the level of absolute disregard to legal foreclosure requirements turns out to be true, servicers may be forced to return properties, or at a minimum, find money to pay damages to those foreclosed borrowers. Adn where is the servicer going to find that money?

All of this in the name of volume-izing the foreclosure piece of the servicing function. Clearly, there isn’t enough malpractice insurance covering Mr. Stern’s law firm to pay for the massive amount of damage that will be found as this case continues. Therefore, the next deep pocket that plaintiff attorneys will turn to is the servicers. As previously discussed in an earlier blog, negligence would be the standard. Audits of this and other law firms will be scrutinized to see if they should have seen the problems. Management will have to justify their pressing on foreclosures and the use of these mills to process foreclosures. Moreover, investors should question how monies are being spent to process foreclosures to see if they are being short-changed in distributions.

So, having finally awakened to the fact that the legal bridge was out, the servicer/engineers are now attempting to stop the foreclosure train from dropping into the economic pit below. With all the help they can muster, these servicer/engineers may just have to do what any of us would do in such a situation. . . pray. Pray that they don’t go over the edge.

JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD

From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.


The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.

It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.

Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?

And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.

I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.

To read the full article by Ms. Borak, see:

http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html

FANNIE/FREDDIE PLAYING THE FASB 157 CARD

From February 11 Wall Street Journal Article by Nick Timiraos, Fannie and Freddie are stepping up their efforts to purchase some $200 billion of delinquent mortgage loans in their securitization structures. Rather than waiting the 24 month period on a delinquent loan, they mortgage-finance giants are looking to buy those loans out after only going delinquent 120 days.
Good news for investors, as Freddie said that it would buy "substantially all" of its 120 day delinquent portfolio, to the tune of about $70 billion, in one single shot. Fannie is looking at a $127 billion portfolio of delinquent loans, which is claims will be repurchasing over a period of time.
Remember, the federal government took over these two organizations a year and a half ago, and providing  over $110 billion from the Treasury. In December, the government agreed that it would cover an unlimited position of losses over the next three yeears, which means that the organizations can't lose. Plus, they can hold the assets and mark-to-market under FASB 157, giving them stronger balance sheet position.