It is widely accepted fact that the U.S. housing/real estate bubble ran our country's economy into the Great Recession. As the fires from that still remain to be contained, let alone talk of smoke clearing being premature with regard to that economic nightmare of historical proportions--and even as
the International Monetary Fund has just acknowledged that the entire West is "stuck in a near-depression" because of it--we are just beginning to ring the bells on a new, raging, eight-alarm fire within our economy which
may (this is by no means inconceivable, at this point) undermine virtually all efforts at a recovery, to date, from the get-go; thus, further propelling our country into a downward trajectory which may already require generations to fully overcome. For the moment, we're calling this:
"The U.S. Foreclosure Fraud Crisis."
It is just beginning.
(In this diary, we're not even going to get into the brutal facts concerning the blatant racial discrimination aspects of this story, which I've discussed in diaries past, which have come to the fore, again, in the past day's news cycle: "
The Foreclosure Crisis Had Significant Racial Dimensions." But, this post from University of Oregon economics professor Mark Thoma, pointing us to a just-concluded Princeton University study on the matter, is well worth the read.)
And, any way you look at it, as I write this, the U.S. foreclosure fraud crisis certainly maintains the velocity and the ferocity to adversely affect our still-reeling economy in a manner which I may only describe as being akin to a category five hurricane hitting downtown New Orleans a week after it was devastated by Hurricane Katrina.
By definition, IMHO, with what are, already, thousands of lawyers representing even greater numbers of plaintiffs and defendants, and with many thousands--if not scores of thousands--more plaintiffs and defendants yet to come to the table in coming weeks/months/years, we're already hearing of the multiple filings of many billions of dollars in class action lawsuits, potential RICO investigations and related criminal prosecutions, just over the past two business days: "The Gathering Storm Over Foreclosures."
The Gathering Storm Over Foreclosures
Peter Henning
White Collar Watch - DealBook
NY Times
October 4, 2010, 9:57 am
Home foreclosures may come to a sudden halt in some states because of problems in the documents filed in court as part of the process to take title to the properties. GMAC Mortgage, JPMorgan Chase and Bank of America have asked judges to stop legal proceedings while they determine whether proper procedures were followed, and it would not be a surprise if other mortgage lenders did the same while reviewing their actions.
The revelation that misstatements may have been made to court filings, and that mortgage documents might not have been as they were portrayed to be, raises potentially serious legal problems for the banks, mortgage processors and law firms that have been involved in the tidal wave of home foreclosures over the last three years. There are likely to be a wide range of government investigations and private litigation that could hound the banks and others for years to come.
--SNIP--
Normally these types of claims would be under state law for fraud, misrepresentation and civil conspiracy, but the cases could be brought in federal court under the Racketeer Influenced and Corrupt Organizations Act, better known as RICO. That statute, one of the few criminal provisions that authorizes civil suits in addition to criminal prosecution, makes it a violation in 18 U.S.C. § 1962(c) for any person to be associated with an "enterprise" who is involved "in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt."
Aside from righteously outing the large banks that are running roughshod over the public, as Henning points out, the incentives for the legal community to milk this nightmare for all it's worth are crystal clear.
...The allure of civil RICO is that the potential liability for a violation includes triple damages and - music to any lawyer's ears - payment of the plaintiff's attorney's fees, recoveries that are usually not available in state court actions...
--SNIP--
.
..This year may go down as one marked by mass litigation...
--SNIP--
...For the banks, mortgage processors, and law firms involved in the foreclosure process, their potential exposure is not yet clear, but they can expect to face legal battles on a number of fronts as this unfolds.
# # #
From Zero Hedge, last night: "Is A 90 Day "Mortgage Meltdown" Foreclosure Moratorium Imminent As The RoboSigning Scandal Goes Mainstream?"
The Massive Mortgage Mess as we affectionately call it seems to be getting new names with each passing day - the latest one is, quite appropriately, RoboSigning Scandal (funny how after the stock market, "robotic" technology will soon becoming equated with the biggest mortgage scam in history). During today's Kudlow segment, CNBC's Diana Ollick who is by and far the company's best (and only) investigative reporter, confirms various so far unfounded rumors, that the government is planning to institute a 90 day foreclosure moratorium as it deals with the realization of just how big and pervasive the mortgage problem is, and even worse, will soon be. It is so bad that even a typically ebullient Larry Kudlow is forced to note that this is the "housing equivalent of the credit financial meltdown" and that "this is going to go on for ever." The biggest issue that is now developing, as we noted last week, is the fact that title insurers (firms such as Fidelity National, First American, Stewart Info and Old Republic) are refusing to insure mortgages in foreclosure or otherwise, uncertain as to who actually owns the title. And for all those who believe this will merely keep prices artificially high, we have very bad news - the problem with the title insurers walking away on fears of lawsuits is that no lender will be willing to write a mortgage without title insurance, meaning that suddenly the up-front component of home purchases will either necessarily have to surge, or home prices will have to plunge by a like amount, as there is simply not enough equity (read money) to cover the resulting debt deficiency. Alas, this mess is just starting, and as people realize how bad it is, it very well may lead to a total collapse in the housing market...
# # #
Here's the latest from Naked Capitalism's Yves Smith, whose been doing an amazing job covering ongoing developments relating to this story over the past couple of weeks: "Multi-Billion-Dollar Class Action Suits Filed Against Lender Processing Services for Illegal Fee Sharing, Document Fabrication; Prommis Solutions Also Targeted."
(Diarist's Note: Naked Capitalism Publisher Yves Smith has provided written authorization to diarist to post her blog's diaries in their entirety for the benefit of the Daily Kos community.)
Multi-Billion-Dollar Class Action Suits Filed Against Lender Processing Services for Illegal Fee Sharing, Document Fabrication; Prommis Solutions Also Targeted
Yves Smith
Naked Capitalism
Tuesday, October 5, 2010 1:14AM
Welcome to our new readers from the FCIC.
Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs' counsel). To give a sense of proportion, LPS's 2009 revenues were $2.4 billion and its net income that year was $276 million.
These suits, one of which was filed late last week, the other Monday, appear to be the proximate cause for the sharp drop in LPS stock, which fell 5% on Friday and 8% Monday (curiously trading was halted after the close of the trading day).
Those close to the foreclosure process have lodged many complaints against LPS. But the two suits we highlight here level the most serious and wideranging allegations thus far.
By way of background, we've described issues with foreclosure mills and the flaws in the securitization process at some length in previous posts (see here and here for some recent posts which contain overview material). As evidence about problems with the foreclosure process have surfaced at more and more servicers, one of the common themes has been that a substantial portion of the foreclosure process was outsourced to various processing companies. Foreclosure defense attorneys have cited one firm, called Lender Processing Service (LPS) as one of the largest as well as more problematic firms in the outsourced foreclosure business. In addition, by 2008, LPS had purchased a company called DocX, the company responsible for the "document production" price sheet cited here earlier.
LPS is effectively in three lines of business (which are organized in two divisions): Technology, Data, and Analytics; Loan Services, and Default Services. The suits focus on the practices of the Default Services operation, which contributed $1.137 billion, or 48% of total revenues. The allegations set forth in the suits involve its Default Services, which organizes and manages foreclosures (including property management and REO auctions) on behalf of servicers.
But the rub in this line of business is that the servicers are technically not the clients. LPS acts a sort of general contractor, farming out various tasks to both internal staff as well as outside firms. But LPS's business pitch to the servicing industry was that it would come in and use a technology platform and provide (if desired) a turnkey solution, FOR NO ADDITIONAL COST than what the servicers were already paying on foreclosures.
How could that be? All of LPS's revenues in Default Services come from the lawyers in the national network of foreclosure mills that LPS has developed over time. Note that these cases may be filed in state court or federal bankruptcy court, depending on the situation of the borrower. In a routine foreclosure, all legal actions will be filed in state court. If the borrower has filed for a Chapter 13 bankruptcy, the Federal bankruptcy court has jurisdiction. In theory, the bankruptcy filing stops the actions of all creditors until the borrower has worked out a payment plan with the court. But in these cases, LPS and its network firms are seeking to break the bankruptcy court time out and grab the borrower's house (the legal procedure is "motion for relief of stay").
To illustrate the degree of control LPS exercises over its network: we have been told by an LPS insider that the software that LPS uses to coordinate with all law firms in its network, LPS Desktop, incorporates a scoring system called 3/3/30. When LPS sends a referral on a foreclosure, the referee is expected to respond in three minutes. When it accepts the referral, it is auto debited (ACH or credit card). In three days, it is expected to have filed the first motion required in pursing the case, and it is expected to have resolved the case in 30 days. Firms are graded according to their ability to meet these time parameters in a green/yellow/red system. Firms that get a red grade are given a certain amount of time to improve their results or they are kicked out of the network.
The cases describe the many fees between LPS and the network law firms. The terms of standard agreements provide for the payment of $150 at the time of referral (the first 3 in the 3/3/30 standard above). Network firms allegedly pay other fees as various milestones are reached, and these are couched as fees for technology, administrative review, document execution, and other legitimate-sounding services. We've also been told separately by LPS insiders that LPS and network law firms split the fee for the motion for relief of stay in bankruptcy court, as well as the fee on a small filing called a proof of claim.
What, pray tell, is wrong with this business model? The two suits attack LPS's very foundations. One case was filed late last week in Federal bankruptcy court in Mississippi and the other in state court in Kentucky. Both make similar allegations, but the Federal case is broader in some respects (it includes a company called Prommis Solutions a firm backed by Great Hill Partners, that like LPS, provides services to foreclosure mills, including one named in this case as defendant along with LPS).
The Kentucky case includes on the RMBS trust issue that we have discussed in this blog. First, it contends that the mortgage assignment attempted by the the local law firm to allow the trust foreclose was a void under New York law, which governs the trust. Hence the foreclosure was invalid. Second, it claims that the defendants (the local law firm and LPS) fabricated documents. Third, the plaintiffs claim that the defendants (LPS and the local law firm) conspired together to practice systemic fraud upon the court and engage fee sharing arrangements, which is tantamount to the unauthorized practice of law (It is illegal for a law firm to split fees with a non-lawyer or to pay a non-lawyer for a referral; it's considered to be the unauthorized practice of law). And this leads to some very serious conclusions. Per the Kentucky case:
This attempt by the Trust to take Stacy's real property is most analogous to stealing since this Trust cannot provide any legal evidence of ownership of the promissory note in accordance with the requirements of New York law which governs and controls the actions of the Trust and the Trustee acting on behalf of the trust.
But the real meat in these cases are the class action claims, and they are real doozies. Both allege undisclosed contractual arrangements for impermissible legal fee splittings, which are camouflaged as various types of fees we described earlier. The suits describe the considerable lengths that LPS has gone to to keep these illegal kickbacks secret, including requiring that all attorneys who join the network keep the arrangement confidential. as well as using dubious "trade secret" claims to forestall their disclosure in discovery.
As bad as this fact pattern is, it has even more serious implications for the bankruptcy court filing in Mississippi. In a bankruptcy case, any attorney pleading before the court must disclose every disbursement pursuant to a case, no matter how minor. Yet the payment of fees to LPS have never been disclosed to a single bankruptcy judge in the US, since LPS requires they be kept confidential. LPS and its network lawyers are thus engaged in a massive, ongoing fraud on all bankruptcy courts in the US.
The Prommis Solutions/Great Hill charges are included only in the Mississippi case. Prommis is broadly in the same business as LPS's Default Services unit ("leading provider of technology-enabled processing services for the default resolution sector of the residential mortgage industry"). And Prommis and its investor Great HIll, like LPS, are not a law firms, which means their participation in foreclosure-related legal fees constitutes illegal fee sharing. Prommis went public this past June. Consider this section from its "Risk Factors" discussion (boldface theirs):
Regulation of the legal profession may constrain the operations of our business, and could impair our ability to provide services to our customers and adversely affect our revenue and results of operations.
Each state has adopted laws, regulations and codes of ethics that grant attorneys licensed by the state the exclusive right to practice law. The practice of law other than by a licensed attorney is referred to as the unauthorized practice of law. What constitutes or defines the boundaries of the "practice of law," however, is not necessarily clearly established, varies from state to state and depends on authorities such as state law, bar associations, ethics committees and constitutional law formulated by the U.S. Supreme Court. Many states define the practice of law to include the giving of advice and opinions regarding another person's legal rights, the preparation of legal documents or the preparation of court documents for another person. In addition, all states and the American Bar Association prohibit attorneys from sharing fees for legal services with non-attorneys.
The common remedy for illegal fee sharing is disgorgement. Remember the magnitude of this business: it accounts for nearly half of LPS's revenues. LPS is a pretty levered operation, with a debt to equity ratio of over 3:1. It isn't hard to see that success in either of these cases would be a fatal blow to LPS.
# # #
As I pointed out in my post, yesterday, the U.S. mortgage industry, from Wall Street to Washington, D.C., and from Florida to Washington state, is--contrary to the "TARP-is-being-paid-off-by-Wall-Street" meme--now backstopped by the U.S. taxpayer to the tune of many trillions of dollars these days. From Fannie Mae and Freddie Mac to Bank of America and Citigroup--and every entity in-between--when Wall Street screws the pooch, at this point and going forward, taxpayers are even more on the hook than ever before. Add 10,000 or 20,000 lawyers to the mix, as is now (or, as it will be, soon enough) the case due to these recent developments, and the spectre of the economy going nowhere fast, for many years, becomes considerably more real than just an alarmist's or conspiracy theorist's talking point.
But, you may flame away about that in the comments if you wish...