- By Andy Kroll Mother Jones
FORECLOSURE MILLS OWE their existence to Fannie Mae and Freddie Mac, the federally guaranteed entities that essentially created, beginning in
1968, the vast marketplace where loans are traded. Their mandate was to promote homeownership by making a large pool of credit available at affordable rates. They accomplished this by buying up mortgage debt from banks and packaging it into bonds, allowing investors to get in on the action. Banks responded by lending out more money, and Fannie and Freddie's combined mortgage portfolio exploded from $61 billion in 1980 to $1.2 trillion two decades later, according to the Government Accountability Office. Their dominance gave them the clout to rewrite rules for the mortgage industry-standardizing underwriting guidelines, loan documents, and the like.
Fannie and Freddie also reshaped the foreclosure industry. Their huge holdings meant they had to deal with thousands of foreclosures annually-even during time when relatively few loans were going bad. In the 1990s, the market expanded into subprime territory to feed the securitization beast, and borrowers began defaulting at higher rates. Hiring lawyers on a case-by-case basis was burdensome, so Fannie and Freddie put together a stable of law firms willing to litigate large bundles of foreclosures quickly and cheaply. They urged these handpicked firms to bring all foreclosure-related services-inspections, eviction notices, sales of repossessed properties, and so forth-in-house. Thus emerged the foreclosure supermarket.
In a recent speech, Stern noted the administration's homeowner-relief program. "Fortunately, it is failing," he told prospective investors.
Stern's company is one of dozens of mills that now churn through more than a million cases a year for Fannie and Freddie, big banks, and private lenders. Built like industrial assembly lines, the mills employ small armies of paralegals and other low-level employees who mass-produce court filings, run title searches, and schedule scores of hearings and property auctions daily. Staff attorneys appear for dozens of court hearings in rapid succession, dashing from one courtroom to the next with rolling file cabinets. Stern and his ilk typically create in-house subsidiaries that bill the parent law firm for the various paper-pushing tasks. "All sorts of crap is loaded on," notes
Irv Ackelsberg, a Philadelphia consumer-law attorney.
The business model is simple: to tear through cases as quickly as possible. (Stern's company handled 70,382 foreclosures in 2009 alone.) This breakneck pace stems from how the mills get paid. Rather than billing hourly, they receive a predetermined flat fee for the foreclosure-typically around $1,000-plus add-ons for all the side services. The more they foreclose, the more they make. As a result, say consumer attorneys and legal experts, even families who have been foreclosed upon illegally-and can afford to make good on their mortgages-end up getting steamrolled. "It's 'How fast can I turn this file?'" says
Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, DC. "For these guys, the law is irrelevant, the process is irrelevant, the substance is irrelevant."
In 2006, for instance, a federal bankruptcy judge blasted New Jersey law firm Shapiro & Diaz for filing 250 home-seizure motions presigned by an employee who had left the firm more than a year earlier. Calling it "the blithe implementation of a renegade practice," the judge slapped Shapiro & Diaz with
$125,000 in fines. The following year, a federal judge in Texas fined foreclosure giant
Barrett Burke Wilson Castle Daffin & Frappier $65,000 for filing computer-generated documents the judge called "grossly erroneous" and "gibberish." Likewise, Wells Fargo was fined $95,000 thanks to shoddy paperwork by
Florida Default Law Group-a
Wells contractor that clearly believed, according to the judge, that "filing any old pleading without undertaking any investigation into its accuracy is perfectly acceptable practice." (In April, the state attorney general's office
began probing Florida Default for allegedly "fabricating and/or presenting false and misleading documents in foreclosure cases.")