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Who’s Who in the Foreclosure Scandal: A Primer on thePlayers

 by Marian Wang ProPublica, Oct. 18, 2010, 10:57 a.m.

Photo by Flickr user nzlawyer.

The unfolding foreclosure scandal just keeps expanding. Scrutiny first fell on the “robo-signers”

who rubber-stamped banks’ foreclosure paperwork  [1], but they’re one of the many players whomay have contributed to the mess.

To help sort it all out, we’ve drawn up a cast of characters. Let’s start with the basics:

Loan Originators/Mortgage Issuers – Banks make mortgage loans to homeowners, which

homeowners must repay. The home serves as collateral in case the borrower defaults on the

mortgage.

Mortgage Servicers – Mortgage servicers collect mortgage payments and foreclose on delinquent

loans. These are usually the nation’s biggest banks [2], which all have mortgage servicing units.

As we’ve noted [3], these servicers have also been charged by the federal government with helping

eligible homeowners avoid foreclosure through the government’s Making Home Affordable loan

modification program.

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The discovery of robo-signing (see our entry for robo-signers below) by employees at major 

servicers — including GMAC [4], Bank of America [5], JPMorgan Chase [6] and Wells Fargo [7]

($) — has initiated a joint investigation by the attorneys general of  all 50 states [8]. GMAC, Bank 

of America, JPMorgan Chase and Litton Loan Servicing, a mortgage servicer owned by Goldman

Sachs, have all temporarily halted [9] all or some foreclosures and are reviewing procedures. Wells

Fargo, which the Financial Times has also flagged as using robo-signers, so far has not [10] halted

foreclosures.

Other contractors – Lender Processing Services, as we’ve noted, helps servicers manage data 

[11]. When loans fall into default, servicers sometimes transfer the loan information to these

 processing firms, effectively outsourcing management of the foreclosure process to companies like

LPS.

LPS is one of the largest [12] firms doing such work. It has been accused in court  [13] of being

involved in illegal fee-splitting arrangements with law firms it hires, though an LPS spokeswoma

told the Journal that the allegations are false, and that mortgage servicers [12] decide which law

firms to hire.

A subsidiary of Lender Processing Services is currently the subject of a federal probe [14] into

how it handled foreclosure affidavits. LPS has acknowledged it once had problems, but says they

were quickly addressed.

“Foreclosure Mill” Law Firms – In states that require judges to vet a foreclosure, law firms

execute affidavits certifying a number of facts key to the foreclosure case.

As financial blogger Barry Ritholz has explained, these signed affidavits attest to [15]: “Ownership

of the note, who the borrower is, the property in question, the date of last mortgage payment,

amount of delinquency, tax escrow owed, other payments (such as homeowners insurance).” They

must also be notarized, or signed in the presence of a notary public, which allows them to be used

as evidence in court.

Some foreclosure law firms, however, often take shortcuts and have been known to foreclose first

and finish the paperwork later [16] by backdating documents. According to the Washington Post,

document processing companies often rewarded law firms with additional bonuses [17] if they met

deadlines for finishing the legal paperwork. (LPS confirmed to the Post that it had paid these

 bonuses in the past, but said it no longer does so.)

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Often servicers outsource some work to foreclosure document companies such as LPS. And those

companies have also been accused of using robo-signers.

The Washington Post, for instance, found that one employee at LPS [22] had for years claimed to

 be an executive of Bank of America, Wells Fargo, U.S. Bank and other lenders. Her  signature alsovaried [23], suggesting they were forged by several different employees.

Foreclosure law firms [24] have also been accused of using “robo-signer” practices and signing

documents on behalf of lenders. From The Palm Beach Post:

Banks that have not pulled back on foreclosure sales and evictions, such as lender CitiMortgage,

gave firms power of attorney to sign documents on their behalf. In turn, some firms created

assembly-line signing systems to keep up with bank deadlines on foreclosure cases.

The operations manager for the Plantation-based David J. Stern law firm said in a deposition last

year that she signed foreclosure papers for two hours a day on behalf of financial institutions

without reading the documents.

And, when the manager wasn't available, employees would forge her signature, according to a

sworn statement taken last month by state investigators of a former Stern paralegal. Stern's

attorney has refuted the employee's allegation.

Fannie Mae and Freddie Mac – Fannie [25] and Freddie [26] are government-controlledmortgage giants that buy up qualifying mortgage loans and guarantee them to investors. They were

essentially independent companies until they exploded spectacularly during the financial crisis,

and were bailed out by the feds to the tune of $148 billion so far.

As the Wall Street Journal explained, Fannie and Freddie also help manage the foreclosure process

 by providing lists of approved vendors [27] to handle “everything from issuing foreclosure filings

to selling homes."

Some of those vendors have included alleged “foreclosure mills.” Fannie and Freddie recentlysuspended [28] referrals to one vendor, the Law Offices of David J. Stern, a Florida “foreclosure

mill” law firm caught up in a probe by the Florida attorney general, but the firm appears to still be

on Fannie’s list of retained attorneys [29] (PDF).

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Like many of the players in the foreclosure system, Fannie Mae had an interest in speeding the

 process along. The Post reported that to get bad loans off its books, Fannie imposed fees and

 penalties [17] on contractors for failing to move quickly:

Fannie declined to comment on these fees. But in a memo to loan servicers dated Aug. 31, GwenMuse-Evans, Fannie Mae's chief risk officer, warned mortgage servicers that fees may be imposed

 based on "the length of the delay and any costs that are directly attributable to the delay."

MERS (Mortgage Electronic Registration Systems) – MERS is a confidential electronic registry

that banks created in 1997 to more efficiently “track” mortgage paperwork. It saved banks time

and money by cutting down the paper shuffle and helping banks avoid paying recording fees to

government recorders, who traditionally kept track of mortgage sales. The increased convenience

for the banks helped enable securitization of mortgages.

“It’s like a Microsoft Excel spreadsheet, only bigger. It doesn’t have images of documents, it

doesn’t have signatures in it. It doesn’t have copies of original documents,” explained Christopher 

Peterson, a law professor at the University of Utah who has written several research papers on

MERS.

“Members of the MERS system can put info on database if it feels like it,” Peterson said. “MERS

uses the word ‘track,’ they say they track servicing rights or ownership rights, but that’s not really

what they do. They’re more of a passive information receptacle.”

In addition to its function as a record-keeper, MERS has also been used as an agent to enforce

foreclosures on behalf of servicers in order to further streamline the foreclosure process. Critics

contend that impedes transparency and makes it harder for homeowners fighting foreclosure to

know who they're dealing with.

The company continues to assert [30] that it has the right to foreclose, and says that “courts have

ruled in favor of MERS in many lawsuits.” (On its website, the company has a legal primer [31]

touting such cases.) However, that assertion is increasingly facing challenge.

The supreme courts of Arkansas, Kansas and Maine have all ruled that MERS doesn’t have the

standing to foreclose on homeowners, according to The Washington Post. The company currently

faces class-action lawsuits [32] in California, Arizona and Nevada.

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A MERS spokeswoman told the Post that lawyers have increasingly alleged wrongdoing [33] on

the part of MERS in order “to stall or prevent foreclosures.”

MERS itself is a small firm (according to The New York Times, in 2009 it had 44 employees [34])

 but has a process by which employees of other companies — mortgage servicers or firms workingfor mortgage servicers — can sign off on behalf of MERS and transfer the mortgage back to the

servicer trying to initiate foreclosure.

Investors – Pension funds, hedge funds, and mutual funds (even those complex investments [35]

known as CDOs) are possible investors in securities backed by mortgages.

They’re quite removed from the front-end players — the mortgage originators, the servicers, the

law firms and the robo-signers therein — but confusion over the true ownership of the underlying

mortgages in a security could cast doubts on investors’ true ownership of the security. Someinvestors may use the situation to try to recoup their losses on mortgage-backed securities by suing

the banks that issued them. From The Washington Post [36]:

 Now, some of the pension systems, hedge funds and other investors that took big losses on the

loans are seeking to use this flaw to force banks to compensate them or even invalidate the

mortgage trades themselves.

… The Association of Mortgage Investors is pressuring trustees to investigate the transfer of loans

in the securitization process. The trade organization has said big lenders should be liable for losses

due to their negligence.