U.S. Criminal Probe: Bogus Foreclosure Docs

Below is a Must Read article in the Wall Street Journal today about an ongoing criminal probe of a Florida-based company that is being investigated for fabricating [bogus] documents for use in foreclosure actions.

Fabricating evidence to prop up foreclosures is finally now being investigated, criminally.  A mortgage company having nothing to hide, or to fabricate for that matter, should not have to engage in this kind of conduct.

This kind of fraud is what makes it difficult for everyone looking to get the foreclosure dispute resolved, including defense counsel, judges, mediators and the homeowner.  The mortgage and banking industry has shown over and over that it cannot be trusted.  Now the same people want to get Florida legislators to allow totally unsupervised non-judicial foreclosures in this state (pending House Bill 1523).

A memo with this article and related evidence attached should be filed with each challenge to bogus foreclosure actions.

By AMIR EFRATI and CARRICK MOLLENKAMP

A subsidiary of a company that is a top provider of the documentation used by banks in the foreclosure process is under investigation by federal prosecutors.

The prosecutors are “reviewing the business processes” of the subsidiary of Lender Processing Services Inc., based in Jacksonville, Fla., according to the company’s annual securities filing released in February. People familiar with the matter say the probe is criminal in nature.

Michelle Kersch, an LPS spokeswoman, said the subsidiary being investigated is Docx LLC. Docx processes and sometimes produces documents needed by banks to prove they own the mortgages. LPS’s annual report said that the processes under review have been “terminated,” and that the company has expressed its willingness to cooperate. Ms. Kersch declined to comment further on the probe.

A spokesman for the U.S. attorney’s office for the middle district of Florida, which the annual report says is handling the matter, declined to comment.

The case follows on the dismissal of numerous foreclosure cases in which judges across the U.S. have found that the materials banks had submitted to support their claims were wrong. Faulty bank paperwork has been an issue in foreclosure proceedings since the housing crisis took hold a few years ago. It is often difficult to pin down who the real owner of a mortgage is, thanks to the complexity of the mortgage market.

During the housing boom, mortgages were originated by lenders, quickly sold to Wall Street firms that bundled them into debt pools and then sold to investors as securities. The loans were supposed to change hands but the documents and contracts between borrowers and lenders often weren’t altered to show changes in ownership, judges have ruled.

That has made it hard for banks, which act on behalf of mortgage-securities investors in most foreclosure cases, to prove they own the loans in some instances.

LPS has said its software is used by banks to track the majority of U.S. residential mortgages from the time they are originated until the debt is satisfied or a borrower defaults. When a borrower defaults and a bank needs to foreclose, LPS helps process paperwork the bank uses in court.

LPS was recently referenced in a bankruptcy case involving Sylvia Nuer, a Bronx, N.Y., homeowner who had filed for protection from creditors in 2008.

Diana Adams, a U.S. government lawyer who monitors bankruptcy courts, argued in a brief filed earlier this year in the Nuer case that an LPS employee signed a document that wrongly said J.P. Morgan Chase & Co. had owned Ms. Nuer’s loan.

Documents related to the loan were “patently false or misleading,” according to Ms. Adams’s court papers. J.P. Morgan Chase, which has withdrawn its request to foreclose, declined to comment.

Linda Tirelli, a lawyer for Ms. Nuer, declined to comment directly on the case.

Ms. Kersch said LPS didn’t actually create the document and that the company’s “sole connection to this case is that our technology and services were utilized by J.P. Morgan Chase and its counsel.”

While the majority of foreclosures go unchallenged, some homeowners have won the right to keep their homes by proving the bank couldn’t show, on paper, that it owned the mortgage.

Some lawyers representing homeowners have claimed that banks routinely file erroneous paperwork showing they have a right to foreclose when they don’t.

Firms that process the paperwork are either “producing so many documents per day that nobody is reviewing anything, even to make sure they have the names right, or you’ve got some massive software problem,” said O. Max Gardner, a consumer-bankruptcy attorney in Shelby N.C., who has defended clients against foreclosure actions.

The wave of foreclosures and housing crisis appears to have helped LPS. According to the annual securities filing, foreclosure-related revenue was $1.1 billion last year compared with $473 million in 2007.

LPS has acknowledged problems in its paperwork. In its annual securities filing, in which it disclosed the federal probe, the company said it had found “an error” in how Docx handled notarization of some documents. Docx also has processed documents used in courts that incorrectly claimed an entity called “Bogus Assignee” was the owner of the loan, according to documents reviewed by The Wall Street Journal.

Ms. Kersch said the “bogus” phrase was used as a placeholder. “Unfortunately, on a few occasions, the document was inadvertently recorded before the field was updated,” she said.

Vacate Foreclosure Judgment & Sale? “No Problem”

Mortgage companies filing foreclosure actions on shaky ground generally do not worry about their judgments or sales being set aside because they know a secret.  They have a get-out-of-jail-card granted to them by our Florida Supreme Court.

The secret, and legal issue, may explain one reason why foreclosing plaintiffs and their attorneys have not been more diligent in bringing their claims against property owners with complete or even truthful pleadings and documentation.  The secret and its history begins with precedent established during the great depression in Quinn Plumbing Co., Inc., v. New Miami Shores Corp., 100 Fla. 413, 129 So. 690, 692, 73 A.L.R. 600 and later affirmed by Bridier v. Burns, 148 Fla. 587, 4 So.2d 853 (Fla. 1941).  In these  two Supreme Court cases it was held that when real property, subject of a mortgage foreclosure judgment, is sold and that sale is later set aside, the mortgage company does not have to return the money paid by the purchaser.  Instead, the court established that in vacating the sale the defendant property owner is restored to his position as title holder, effectively wiping out any deed created with the completion of the public sale, the rights of the mortgagee are then subrogated to the purchaser.  In other words, the purchaser steps into the shoes of the mortgage company and now has all the rights the mortgagee had.  The Bridier court stated “[S]uch purchaser becomes virtually an equitable assignee of the mortgage and of the debt it secured, with all rights of the original mortgagee, and becomes entitled to an action de novo for the foreclosure of such mortgage against all parties”.  Accordingly, to recover money paid for the purchase of the property the purchaser now has to enforce the mortgage and note.

In the case leading to Bridier, Bridier v. Burns, 145 Fla. 642, 200 So. 355, a foreclosure judgment led to the sale of real property in Volusia County. The sale was timely challenged by the filing of objections backed by a proper supersedeas bond.  The Clerk of the Court rejected the bond and relief was sought by petition seeking certiorari.  In granting certiorari the court declared the deed resulting from the sale as null and void.  On remand, however, the lower court denied the original property owner to be restored as title holder and that issue was brought before the appellate court as a petition for modification.  In reversing the lower court, the opinion stated “[W]hen a foreclosure sale is set aside by an order of court for any fatal irregularity, the title acquired by the purchaser is thereby vacated. The law subrogates the purchaser at the void foreclosure sale to all the rights of the mortgagee in the indebtedness and the mortgage securing the payment of the same.  The mortgage and final decree are not affected by the void sale.”

The Bridier court cited Quinn, where the court held “It is well established in this jurisdiction that the purchaser of mortgaged property at a foreclosure sale, when for any reason the foreclosure proceedings are imperfect or irregular, becomes subrogated to all the rights of the mortgagee in such mortgage and to the indebtedness that it secured. Such purchaser becomes virtually an equitable assignee of the mortgage and of the debt it secured, with all rights of the original mortgagee, and becomes entitled to an action de novo for the foreclosure of such mortgage against all parties holding junior encumbrances who were omitted as parties to the foreclosure proceedings under which the purchaser bought.”  The holding in Bridier remains law in Florida as it was also cited in American Bankers Life Assur. Co. of Fla. v. Williams, Salomon, Kanner & Damian, 399 So.2d 365 (Fla. 3^rd DCA 1981).

So what’s the big deal?  For starters, there appears to be very little incentive for the foreclosing plaintiff to make its foreclosure complaint to be accurate or even truthful at the time of filing the action.  Foreclosing plaintiffs realize that judges are always inclined to grant a foreclosure judgment.  Why work any harder?  There is also little risk associated with presenting shoddy or even fraudulent foreclosure pleadings because after the property is sold, and the plaintiff gets paid, the law established by Quinn and Bridier shield the mortgage company from having to forfeit the proceeds – assuming someone else has purchased and paid for the property.  If the foreclosing plaintiff has acquired the property by bidding any portion of their judgment there is also little risk because the setting aside of the sale merely leads to restoring the property owner to his position as title holder prior to the completion of the vacated sale.  No sanctions, attorneys’ fees or other form of risk – ever.

Additionally, if the foreclosing plaintiff has also taken possession of the property beyond the sale, even if set aside, Florida law even shields the mortgage company from having to relinquish possession to the mortgagor according to the holding in 601 West 26 Corp. v. Equity Capital Company, 178 So.2d 894 (Fla. 3^rd DCA 1965)(holding it would not be proper under the law to require the mortgagee in possession to surrender the premises to the mortgagor (or to a receiver unless need for the later should appear) pending accounting and necessary resale. This is so because it is established that a mortgagee who acquires possession of property in good faith on a foreclosure sale which later is set aside holds as a ‘mortgagee in possession,’ entitled to retain the property until the mortgage debt is paid or redeemed, or the property foreclosed).

This might explain the mortgage industry’s mad dash to get foreclosure complaints through the courts as quickly as possible.  The strategy has been effective and even aided by the concept of a “rocket-docket”.  And, the foreclosure mills are all too eager to be paid to prop up the scheme.  It’s easy money.  For about $1,200 a case all we have to do is get the judgment – using a production line workflow.  File the complaint, even if it is not accurate, complete or truthful; push it through and get the judgment; sell the property and collect the money.  The buyer at auction is S-O-L if the sale is set aside – minor detail.  Mortgage company client gets to keep the proceeds and the buyer has to work it out.  Next case.  One has to wonder how many times this precedent has been the subject of discussions, negotiations or letters exchanged between foreclosure property buyers and the foreclosing plaintiff’s attorney.  It would be throwing good money after bad for the investor to try getting their purchase money back especially with precedent dating back to 1930.  Investors would simply have to take it on the chin.

The foregoing suggests that any litigation flowing from vacated judgments or sales set aside, the fight over the property, the rights of the mortgagee and anything related to the proceedings leading up to the public auction and sale will be between the former property owner and the purchaser at the sale conducted by the Clerk of the Court.  Such a deal.  Can anyone say “caveat emptor”.  In the end, this well-kept secret will continue to fuel the mortgage industry’s rush to displace homeowners even when there is no right to foreclose in the first place.  After all, what’s the risk?