The roots of foreclosure-gate: incentives and lawyers

Larry Ribstein —  17 October 2010

Careless or even fraudulent documentation in foreclosure actions has stalled foreclosures, stymied recovery of the housing market, threatened the earnings and even financial stability of banks, and may lead to massive securities fraud actions.  How did this happen?  Per CR:

[A] combination of getting swamped with foreclosures, lack of experienced staff, the poor economic environment for servicers, and outsourcing to the lowest bidder, all contributed to the servicers using “robo-signers”.

From WaPo:

To keep up with the crush of foreclosures, document processors and mortgage service firms rushed to hire anyone they could – hair stylists, Wal-Mart clerks, assembly-line workers who made blinds – and gave them key roles in their foreclosure departments without formal training, according to court papers. A number of these employees have testified that they did not really know what a mortgage was, couldn’t define “affidavit,” and knew they were lying when they signed documents related to foreclosures * * *

More on incentives (WaPo again): 

[V]irtually everyone involved – loan servicers, law firms, document processing companies and others – made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge. * * * The law firm of David J. Stern in Plantation, Fla., for instance, assigned a team of 12 to handle 12,000 foreclosure files at once for big financial companies such as Fannie Mae, Freddie Mac and Citigroup, according to court documents. Each time a case was processed without a challenge from the homeowner, the firm was paid $1,300. It was an unusual arrangement in a legal profession that normally charges by the hour.  The office was so overwhelmed with work that managers kept notary stamps lying around for anyone to use. * * *

Law firms were rewarded with additional bonuses from document processing companies if they met deadlines for preparing and filing foreclosures in courts. * * * Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home. On top of that, Fannie charges a penalty – which escalates for larger mortgages – on contractors who delay selling off such properties. * * * Speed is also rewarded by the nation’s credit-rating agencies, which give higher grades to mortgage service firms that accelerate the foreclosure process and generally hand out lower grades to those who hold onto delinquent loans. A Fitch Ratings manual calls the speed of foreclosures “the key driver in the servicer rating,” according to a report by the National Consumer Law Center. * * *

(So here we have Fannie Mae in the middle of yet another financial crisis.)

More on the lawyers (NYT, via CR):

[F]ormer employee recently testified that Mr. Stern’s firm, in a rush to file and complete thousands of foreclosures, routinely violated procedures by having foreclosure-related documents notarized that were never checked for accuracy — all with the lawyer’s knowledge. * * *

Years ago, lawyers once handled and verified most of the paperwork involved in a foreclosure. But the advent of mortgage securitization a decade ago, financial experts say, gave rise to a parallel legal industry. In it, a law firm is paid a flat fee by loan servicers to handle a foreclosure, which is lucrative for lawyers who process a high volume of cases.  “This is a very profitable business model,” said O. Max Gardner III, a lawyer in Shelby, N.C., who defends homeowners in foreclosure proceedings. “You’ve got five lawyers and four hundred people without legal training working for them.” * * *

According to the lawsuits filed this month against Lender Processing Services and Prommis Solutions, plaintiffs’ lawyers accused the companies of using various mechanisms to steer legal work to foreclosure mills, then splitting legal fees with the lawyers running those operations. In many states, it is illegal or unethical for lawyers to split fees with nonlawyers. Both Lender Processing and Prommis essentially act as informational middlemen between mortgage servicers and law firms doing foreclosure work. Both have denied being involved in such practices.

In recent papers (Death of Big Law, and the in-process Owning the Law) I have described an industry in transition from one-to-one legal advice to more commoditized legal information and mass production.  When I present these ideas I’m often accused of inviting the degradation of a once-proud profession.  My response is that this is not something I’m advocating.  I’m describing changes that are already occurring.  The disaster will come if lawyers and others fail adequately to recognize and deal with these developments.

Foreclosure-gate is partly a product of a law industry which has already embraced mass production and in which non-lawyers (e.g., mortgage servicers and the “informational middlemen” named above) are calling the shots.  Current ethics rules require legal work to be done by lawyer-owned law firms.  So we get “law firms” with “five lawyers and four hundred people without legal training.”  Discarding outmoded regulation and ethical rules that fail to deal with the realities of modern law practice would help involve more credible firms that could put the industry on a sounder business footing.

Of course, there’s another possible future:  regulation that attempts to stop these practices without taking account of the pressures and incentives that caused them to happen.  This is likely to make things worse.

Larry Ribstein


Professor of Law, University of Illinois College of Law

30 responses to The roots of foreclosure-gate: incentives and lawyers



    Yes it is possible that the Washington Post story is incorrect, or that I have been fooled.

    And, yes it would make sense to wait until these claims have been properly scrutinized in a legal proceeding before making definitive claims.

    Here is a transcript from the Countrywide proceedings, which may illuminate matters.


    I know lawyers get excited about paperwork being done wrong, but isn’t this akin to those bad old days of the common law when if your scribe spelled a word wrong it invalidated the entire contract? Has there been even a single case of a bank foreclosing on a house when the the borrower had not skipped the legally required number of loan payments, whatever that is?

    Remember: banks don’t like foreclosing. They’d much rather get the mortgage payments, so the bank has every incentive to go easy on borrowers.

    I really am serious in my question. Has anyone heard of injustice occurring because of a bank foreclosing on a mortgage? (I’ve heard plenty about the opposite injustice— people borrowing, not repaying, and blocking the bank from reselling the property for some time after it was clear they were not going to repay.)


      Eric, take a look at this:

      There are some serious problems here – not mere technical errors.


        Thanks for responding, Michael, but hasn’t the Washington Post reporter fooled you? I didn’t see any specifics at all in that story, just lots of ominous language about how federal laws *may* have been violated. And it sounds to me like what they are obliquely referring to as lying and fraud means “saying that person X verified that the documents were correct when it was actually person Y”, rahter than “saying documents were correct when they were false.”

        Also, I bet the Washington Post didn’t say anything because Justice didn’t tell them anything. Note:

        “In recent weeks, senior lawmakers have called for a federal probe into the use of flawed foreclosure documents and improper practices. But Obama administration officials offered few details about how they were proceeding. ”

        That means,”The Obama administration wants to find wrongdoing, but they don’t have anything yet that people wouldn’t laugh at, so they just make serious-sounding noises.”


    So let me get this right. some one comes to the door to evict,
    and you tell them to produce the original note in order to prove they own the property they are foreclosing on. No original note,therefor no proof, therefor, no fore closer?


      Well, that would be the first step: no proof of ownership of the note, no standing. (But, talk with an attorney familiar with your state – I am only relating my understanding of some of the documents and lawsuits. You cannot rely upon this as legal advice.)


    It appears that a massive amount of fraud is happening. Why no arrests? We’re talking about criminal actions here so why no arrests?


    Shocker, Lawyers acting unethically. Why is anyone really surprised?


    I really hope people get sent to jail for this. This is utterly absurd.


      Oh, people WILL go to jail over this, of that you can be sure. Personally, I hope the PEOPLE RESPONSIBLE for this mess are the ones who do so, but I suspect it will mostly be their victims, instead. :-/


    MERS…owned by Fannie and Freddie.

    The taxpayer is on the hook w/ this foreclosure delay via Fannie and Freddie.


    Crooked lazy lawyers and bankers–I’m shocked, I tell you, shocked!

    Computerized records or not, if I personally try to sell a piece of real estate in any state, I darn well better have my paperwork in order and be prepared to survive a title insurance research team. If I falsify a document or two along the way, I should rightly expect to do some time in a correctional institution. Why should the rules be different for a large banking institution, lawyers, robo signers, for any reason (including the cry that we had a lot of foreclosures hit at the same time)?

    Oh, I forgot, they all contribute big time to the politicians and are part of the elite that doesn’t really comply with the rules for the little people!


    This work isn’t legal work. There are/were a handful of lawyers getting rich on this model, but it clearly wasn’t going to last. The worst thing about this is, reform is likely to drive the paperwork back into law firms, when it needs to go to non-legal firms that are adept at handling records.


    I read the cited articles, and the articles they linked. As nearly as I can make out, this whole scandal is about documents that should not be problematic. When trying to prove the debts, the mortgagees/creditors/services rely, as do all modern businesses, on their computerized records. If the debtor/mortgagor thinks those records are wrong, that is one issue. But, to cavil about the form of the certification when nothing else can be raised as a defense is mere pettifoggery, and should not slow down the foreclosure process.


      Walter, they lost who owns the promissory note. This is effectively the same as finding $20 – somebody owned it, but you don’t know how.

      Person of Choler 18 October 2010 at 7:37 pm

      I rather doubt that the financial geniuses caught in this mess would buy a car without proper title. I would bet that most of them got title insurance when they bought their houses and were sure that the abstract and title information was correct and properly registered. What made them think that they could hand around half-million dollar mortgages with dodgy documentation?

      Its one thing to think you own something and quite a different matter to prove that it’s yours.



      “When trying to prove the debts, the mortgagees/creditors/services rely, as do all modern businesses, on their computerized records. ”

      No. Real estate requires deeds and other paperwork and are still very much 19th century. As a professional programmer every database has bad data in it. Would you like to have your home foreclosed upon because someone transposed a digit in the street address and then have the mortgage company “prove” that they owned the mortgage because of their computer records?


        Memomachine: the balance due on your mortgage, like the balance due on your credit card is evidenced only by bank records, which are solely computerized records. Ownership is not a question in the referenced articles.


      Chain of title has been passed down from English Common Law. Therein lies a big part of the problem. The law here is very clear…when the note is passed along to another party, it needs to be signed and notarized. If that does not occur, THE NOTE IS VOID. Those signatures and notarizations (i.e., the chain of title) did not occur at the time they were passed or sold, in violation of the law. Now the “foreclosure mills” are trying to go back and recreate a paper trail…in many foreclosure proceedings, no one can even produce the original note.

      MERS was supposed to help track what mortgage was part of which particular investment vehicle but there was a major breakdown the mortgage-backed securities (or REMICs..real estate mortgage investment conduits) and MERS. In most cases, the notes were not signed and therefore, THERE IS NO CLEAR CHAIN OF TITLE. Unbelievable incompetence.


        This is not correct. You are confusing the assignment of the mortgage loan, the debt secured by the mortgage, and the “assignment of mortgage”. There are two ways to transfer a note secured by a mortgage. First, to transfer a note, it must be indorsed by the payee, but it need not be notarized. If indorsed in blank, any transferee that holds the note is the owner of the note. If the note is indorsed to an identified person and delivered to the identified person, then the identified person must indorse the note to transfer the note to the next holder. Second, however, if the note is not indorsed ownership of the loan can be transferred. The only difference is that the transferee must prove the transfer, that is, a signed agreement transfereeing the mortgage debt evidenced by the note.

        Finally, the mortgage follows the note. An assignment of mortgage and notarization of the assignment is required to record the assignment in the land records. This changes the identify of the mortgagee of record, which is important for transactions affecting the land records, such as filing releases of the mortgage upon payment or conductin foreclosure of the mortgage upon non payment of the mortgage, but which his irrelevant for purposes of transfering the ownership of the loan or the contractual right to be paid, including the right to foreclose.


      Michael Webster: Ownership of the note is not what the affidavit was about. The purpose of the affidavit was establishing a predicate for the admission of a business record under the Rules of Evidence Rule 803(6). The record in question is the balance due on the mortgage.


      I find the objection to ‘the paperwork is faulty defense’ argument rather weak. Is it not true that the paperwork must conform to rigid guidelines so that every mortgage is accurate and equal to any other in legal standing? And is it not also true that when such papers are in disarray that they may be questioned in a court of law?

      My reading of this scandal over the years has been that the majority of the mortgages put into the mortgage backed securities were in fact intentionally made to be non-conforming, and the more so the better as they became more risky and hence have a higher return. To suddenly say that the poorly documented ownership papers is just a diversion from the failure of the mortgage is to overlook the essence of the problem. The paperwork IS the problem, nobody will buy a house when the actual ownership is in question. The people responsible for creating this mess should be held accountable as they violated the law and the spirit and intent of the law willingly and and with clear malice towards the market and the buyer(s). This is the essence of property law at stake. These people who created the faulty paperwork destroyed the value of those properties as surely as if they had bulldozed those houses and salted the land they were built on.


    This is interesting – mortgage backed securities have been around for at least 20 years, and proving title or standing was a problem for in S&L foreclosures. Nobody appears to have learned from that crisis.

    I wonder how much of this was inadvertently caused by the prohibition against fee splitting?

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