GSEs (Fannie/Freddie),FHA&HUD

Questions Rising Over Fannie’s and Freddie’s Oversight of Foreclosures

Posted on Thursday, October 21, 2010

Employees of Fannie Mae and Freddie Mac descended on the law offices of David J. Stern seven or eight times during 2008 to scrutinize the Florida firm’s processing of foreclosures. They made one major demand, according to a former employee.
“Pick up the speed.”
Fannie and Freddie, the wards of Washington that own more than half the nation’s mortgages, have largely avoided scrutiny amid the uproar over fast-and-loose foreclosures. But the companies are the dominant customers of the industry that has grown up to remove people from homes they cannot afford.
They controlled which companies could service their loans. They decided which law firms could process foreclosures. And they pushed for speed, because delays cost money.
But they did not notice or act to prevent what former employees of some loan servicers and law firms now describe as a pervasive disregard for the legal requirements to seize a home.
The Stern firm, endorsed until recently by both Fannie and Freddie, performed the legal work for more than 70,000 foreclosures last year. State and federal agencies are now investigating its role, which included making sure that banks were taking back the right homes.
Both companies instructed servicers to stop using the Stern firm earlier this month. But the Florida attorney general is also looking at three other law firms that are among the eight Florida firms Fannie still requires servicers to use. Two of the firms are on Freddie’s list, too.
Kelly Scott, a legal assistant at the Stern firm during 2008, said she had been trained to forge her supervisor’s name on legal filings to move paper more quickly, as were other employees, according to a deposition released Monday by the Florida attorney general’s office.
She said Mr. Stern had pushed employees to move with particular speed on foreclosures involving Fannie Mae and Freddie Mac. “Those were considered his babies,” Ms. Scott said in the deposition. “Those files needed to be pushed as any file, but with an extra push to it.”
Critics say the emphasis on speed may have blinded Fannie and Freddie to the accumulation of evidence over the last several years that servicers and law firms were cutting corners. For now, there is no investigation of their oversight, but questions are being raised.
“Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?” Representative Alan Grayson, a Florida Democrat, wrote in a blistering letter to the company in late September. He said Tuesday that he had not received a response.
Spokesmen for Fannie and Freddie said that the companies did watch servicers and law firms carefully, but that they ultimately relied on those firms to follow the law. The companies said that they were among the victims of any misconduct, and that they would seek compensation for any losses, sheltering taxpayers from the impact.
“We have a very reasonable expectation that our servicers and these professional legal firms will adhere to proper procedures and conduct,” said a Fannie Mae spokeswoman, Amy Bonitatibus.
Jeffrey Tew, a lawyer who represents Mr. Stern and his firm, said he would not respond to what he characterized as “allegations from disgruntled former employees.”
He said the Florida attorney general’s office was smearing Mr. Stern by providing the depositions to the news media without giving Mr. Stern any chance to question the accounts.
Mr. Tew noted that no charges had been filed against Mr. Stern or the law firm.
Fannie Mae and Freddie Mac buy mortgage loans and related securities. The payments on those loans are collected by companies called servicers, which keep a small portion as their fee. If a borrower stops making payments, the servicer is responsible for pursuing a foreclosure and then transferring the property to Fannie or Freddie. The companies require servicers to complete the process in a fixed period — in Florida, 185 days — or else face fines.
Foreclosures require judicial approval in 23 states, which in turn requires the involvement of a lawyer. Fannie Mae requires servicers to pick a law firm from a list of 167 “retained attorneys.” Freddie Mac recommends that servicers choose from 56 “designated counsels.”
Firms compete fiercely to make the lists. Fannie and Freddie say the system helps to hold down costs because the firms agree to cut fees. The Fort Lauderdale firm of Marshall C. Watson, for example, charges $200 for a title search on Fannie Mae files. Other clients paid $325.
Fannie and Freddie have increased their oversight of the law firms in recent years, as record numbers of foreclosures forced the pair to rapidly expand their infrastructure for seizing homes.
Ms. Scott said in her deposition that the Stern firm had prepared carefully for audits by the two companies. She said she participated in modifying more than 500 files to conceal problems.
Ms. Scott said that Mr. Stern had cultivated a close relationship with Fannie Mae and Freddie Mac. She said that she had been instructed to buy food and drinks for the auditors, and that the firm paid travel and hotel expenses for them as well.
Tammie Lou Kapusta, a former paralegal at the Stern firm, told the attorney general’s office that people would work through the night to prepare for audits, including changing the reported dates for various steps in the process to comply with the requirements.
Ms. Kapusta said that employees were told to dress up on audit days.
Douglas Duvall, a Freddie Mac spokesman, said the company had “no reason to believe” that any employee had accepted payments for travel or lodging from the Stern firm. Ms. Bonitatibus of Fannie Mae said that “to our knowledge,” no employee had expenses paid by the Stern firm.
Fannie Mae said it decided early this year to increase scrutiny of its Florida law firms, hiring an independent company to conduct occasional audits. Those reviews did not turn up evidence of the problems now alleged by the former employees, Fannie Mae said.
Last month, Fannie Mae retained a second outside party, the law firm Bradley Arrant Boult Cummings, to scrutinize the Stern firm. That review is continuing.

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