by David Dayen
CNN asked Michael to come on. Michael, of course, forwarded the request to Lisa. They rushed to a local affiliate, where Lisa sat in a tiny studio while anchor Mary Snow asked her questions for thirty minutes. At the end, the cameraman told her, “I know three people in foreclosure; thanks for what you’re doing.” Lisa and Michael decamped to a nearby bar to watch her first national interview. Right before it was supposed to air, CNN broke away for important breaking news: a tractor-trailer filled with pigs flipped over on a Canadian highway. Authorities tried to corral the swine as they strolled across the road. Lisa headlined the Foreclosure Hamlet recap “Preempted by a Passel of Pigs Being Put in the Pen (Hopefully Foreshadowing Reality).”
MSNBC’s Dylan Ratigan didn’t preempt Lisa, bringing her on live. “MBS? There are no mortgages backing these securities, they didn’t put them in. I think we should call these ‘malicious bankers with syphilis,’” Lisa said, reciting a line she’d practiced that whole day. Ratigan remarked on the air that Lisa could take over for him if she was available some afternoons. A thousand miles away in Massachusetts, Andrew “Ace” Delany watched the show with his dad. After the syphilis line, his dad said he wanted to adopt her.
Every second of every day was filled. Michael and Lisa set up “emergency happy hours” statewide, including Tampa and St. Petersburg. The documentary filmmakers behind Inside Job contacted Lisa. Michael got to blog at the cranky yet high-traffic finance site Zero Hedge. While in Sarasota for a seminar, Lisa bumped into Florida governor Charlie Crist, who was running for U.S. Senate. Halfway into a black SUV, Crist turned around, pointed at Lisa, and said, “I want to talk to you.” Lisa couldn’t believe she was the one being recognized.
After hearing about the accelerated rocket docket, two attorneys with the American Civil Liberties Union’s (ACLU) Racial Justice Program, Larry Schwartztol and Rachel Goodman, called Lisa and Michael for information about potential constitutional violations of due process. They filed public records requests, finding that the Office of State Courts Administrator distributed court funds based on the percentage of cases completed. Schwartztol and Goodman flew to Palm Beach to meet with Lisa and Michael, who set them up with statewide contacts.
Lisa and Michael enjoyed their unusual moment in the spotlight because they finally saw an ending: people in charge would take over, and they could fade away. But they had to stay prominent for now, because there was a lot of nonsense to knock down. Lisa found a flood of “replacement” mortgage assignments and affidavits being filed across Florida. Michael wondered how they managed to find people with deep personal knowledge of hundreds of thousands of foreclosure cases so quickly. Particularly amusing were the “found allonges,” when the rules stated that allonges had to be attached to original notes and therefore couldn’t simply be found.
The industry next dismissed the scandal as a matter of “bad paperwork,” as if someone in the back office just forgot an initial somewhere. They didn’t want the public to understand that they had no proof of ownership on the homes they were seizing in foreclosure cases. The American Securitization Forum, a leading trade group for Wall Street banks, invented a clever refrain: “The mortgage follows the note.” That way, faulty mortgage assignments were irrelevant. Of course, the notes were faulty, too. The theory also contradicted the securitization agreements, which clearly stated that assignments had to be conveyed into trusts for the asset to be valid.
The Service Employees International Union started a campaign called Where Is the Note? Under the 1974 Real Estate Settlement Procedures Act, homeowners, whether in foreclosure or not, could ask servicers for original mortgage documentation and be guaranteed a response within sixty days. SEIU uploaded a “qualified written request” form for homeowners, and servicers got six thousand letters in the first few weeks. SEIU organizers sifted the replies into three categories: “we don’t know,” “we won’t tell you,” and “no comment.” If this was the reaction to notes, what the industry considered the good paper, what did the really bad stuff look like?
A remarkable “news” piece in the Wall Street Journal entitled “Niche Lawyers Spawned Housing Fracas” carried a distinct attitude of And we would have gotten away with it, if it weren’t for you meddling kids. “Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing,” author Robbie Whelan wrote, intimating that forcing plaintiffs to prove their cases was unfair. Industry mouthpieces warned that clogging foreclosures would trigger economic disaster, reducing cash flows to mortgage companies and delaying market “clearing.” Of course, foreclosures hurt the economy, lowering property values and tearing up communities. The Daily Show’s Jon Stewart asked, “So we can improve the economy by throwing millions of families out of their houses just in time for the holidays? . . . Because apparently now we have a foreclosure-based economy.”
The most common argument was that borrowers deserved to lose their homes for missing payments, which ignored not only the foreclosures on people who were current on their mortgage but also several hundred years of judicial procedure. “Fraud doesn’t erase the fact that the borrower agreed to make payments or face the penalty of losing her home,” sniffed CNBC’s John Carney. But it actually does erase that: that’s how the criminal justice system works. If the prosecution violates procedures, it loses, regardless of the status of the defendant.
Behind the rhetorical effort was a quieter strategy that reached the desk of Ohio secretary of state Jennifer Brunner. On September 30, the same day she announced the criminal referral in the Beth Cottrell notary fraud case, she received an email from Leslie Reynolds, executive director of the National Association of Secretaries of State: “We just learned that HR 3808, Interstate Recognition of Notarizations Act, which passed the House under a suspension of the rules in April 2010, was passed by the Senate on September 27.” In a near-empty chamber, Senator Bob Casey’s motion to approve HR 3808 by unanimous consent passed without debate. Reynolds’s group, which opposed the bill, was never informed; in fact, they were told in August it wouldn’t get a vote.
HR 3808 came from an obscure Alabama Republican named Robert Aderholt, who claimed he introduced it upon a constituent’s request. It would require state and federal courts to “recognize any lawful notarization . . . commissioned under the laws of a State other than the State where the court is located.” Brunner discovered that three states allowed electronic notarizations: Nevada, Minnesota, and Arizona. E-notarizations meant that signers of official documents would not need to personally appear before a notary. Brunner envisioned mortgage companies moving their document assembly lines into t hose three states, forcing courts to accept electronic notarizations, and the underlying paperwork, as presumptively valid. States could challenge the statute, but that could take years of appeals, with untold numbers of foreclosures processed in the meantime.
Congress was out of session, with campaigning intensifying for the midterm elections. HR 3808 was just sitting on President Obama’s desk. Brunner sent the bill text to Dan Junk, and he and his colleagues agreed HR 3808 could make it more difficult for attorneys to challenge documents. Brunner did two things. First she blasted her old Senate campaign email list, asking a half million subscribers to contact the White House and tell the president to veto HR 3808. Then she called Campbell Spencer, political liaison to the White House during her Senate race. Spencer, who was still working in the West Wing, promised to pass word to her colleagues.
News of HR 3808 reached Michael and Lisa. Michael reposted Brunner’s email at 4closureFraud. Thousands of people contacted the White House; at one point the switchboard lines jammed. Once the veto movement went viral, legal experts split over whether HR 3808 would truly grease foreclosures through the system. Some argued that even with valid e-notarizations, bad assignments and affidavits could be challenged. But activists weren’t interested in a debate: they just wanted the bill stopped.
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br /> On October 7 the White House announced that the president would give HR 3808 a pocket veto, refusing to sign the legislation because of the “unintended impact of this bill on consumer protections, including those for mortgages.” Like 99 percent of America, Michael didn’t know what a pocket veto was. A president could withhold his signature from a bill and prevent it from becoming law when Congress was out of session. But Congress was still holding pro forma meetings while away from Washington, to block recess appointments. Some observers were anxious that a pocket veto would not take, and the bill would become law without the president’s signature on October 12, ten business days after passage, unless he sent it back to Congress. Michael published his findings, including emails from readers featuring arcane discussions of veto procedures and constitutional law.
That night Michael got an anonymous email that read, “You’re right and you need to follow through on this.” He ignored it—by this point he was getting wacky emails all the time—but the same emailer sent another one the next day: “Keep at this, keep going.” The tone made Michael believe this was not a random oddball, but someone with inside knowledge.
White House reporters peppered spokesman Robert Gibbs with questions about whether a pocket veto would hold during pro forma sessions. Michael’s alert about whether the pocket veto was valid became the most-read page in the history of 4closureFraud. And on October 9 the White House issued a second press release: “To leave no doubt that the bill is being vetoed, in addition to withholding my signature, I am returning HR 3808 to the Clerk of the House of Representatives.” Lisa told Michael, “They’re talking to you about that.”
In President Obama’s first six years in office he vetoed only two bills, and one was a stopgap defense bill made redundant by passage of a separate appropriation days later. So HR 3808 represented the only time in six years anyone stopped Barack Obama from signing a bill that passed Congress, all thanks to people power.
Well, plus one other individual. A couple of months after the veto, Jennifer Brunner heard from Elizabeth Warren, the Harvard professor who had been installed in September 2010 as a special assistant to the president, overseeing the implementation of her brainchild, the Consumer Financial Protection Bureau. Warren thanked Brunner for warning about HR 3808; her staff found out via Campbell Spencer, Brunner’s White House contact. There were rumors on the blogs that Warren personally intervened to convince the president to veto; when Brunner asked about that, Warren would only say, “One person really can make a difference.”
Lynn Szymoniak also delighted in the Great Foreclosure Machine’s collapse, though not as publicly as Lisa and Michael. Instead she went back to every contact she made over the past year, with links to every deposition, every exposed bank, every false document. There would have to be prosecutions now, Lynn thought, not because of any commitment to right and wrong but because the negative publicity raised the pressure in Washington. A package of 150 robo-signer depositions from Deerfield Beach defense attorney Peter Ticktin only turned up the heat. Deponents couldn’t define the terms “affidavit,” “promissory note,” or even “mortgage,” which might have been fine if that wasn’t what they worked on for a living. Before becoming vice presidents on paper, robo-signers held jobs like hair stylist, Walmart greeter, and assembly line worker. “I don’t know the ins and outs of the loan, I just sign documents,” said one robo-signer.
So when attorney general Eric Holder said on October 6 that the Justice Department was “looking into” the allegations, Lynn was nonplussed. A federal grand jury had been empaneled in Jacksonville for nine months. And DoJ was intensely involved in her qui tam case, holding meetings and deputizing Lynn to write confidential information disclosures. Even if Holder knew nothing, someone in Washington could pull up the pending cases, from Jacksonville to Lynn’s inquiries in North and South Carolina. There was a ready-made latticework of legal actions waiting for DoJ to grasp. So far Justice was playing dumb.
Meanwhile, the Jacksonville case moved at the speed of a man walking through quicksand. Lender Processing Services, parent company of DocX, hired a Bush-era assistant attorney general, Paul McNulty, among their flotilla of lawyers in the case. Agents told Lynn that LPS denied the Linda Green inaccuracies by calling their practice “surrogate signing,” as if it were routine for multiple employees to forge a colleague’s name on legal documents.
At the Florida attorney general’s office, June Clarkson and Theresa Edwards subpoenaed information on six former DocX employees and LPS’s internal records, and LPS responded in typical firehose fashion, sending enough notebooks and files to overwhelm the office. June and Theresa began to wade through the records, but David J. Stern’s embattled law firm also drew their focus.
Right around the time of the GMAC moratorium announcement, June and Theresa took a deposition from Tammie Lou Kapusta, a former senior paralegal with Stern. She testified that all foreclosure documents were created and signed in-house, without input from servicers or default services providers. How would a law firm have the manpower to create thousands of documents, June and Theresa wondered. “Well, there was work being done offshore,” Tammie Lou said, identifying facilities in Guam and the Philippines. Offshore doc shops generated the “casesums,” specific file information like unpaid principal balance and fee calculations. It resembled Firm Solutions, the Panamanian facility where Lisa Epstein’s documents were prepared. All the paralegals at Stern did was sign their name.
Tammie Lou kept talking. Homeowners frequently didn’t get served legal papers, even though Stern goosed fees by charging for serving nonexistent tenants or unknown spouses. Mortgage assignments were always produced after the foreclosure case was entered. Affidavits of indebtedness went out with incorrect figures. Notes got lost all the time, as entry-level employees threw things out or placed documents in the wrong files. And the business with the signatures was completely illegal. “I don’t think any notary actually used their own notary stamp. The team used them,” Tammie Lou said.
“There were just stamps around?” June asked.
“Correct. We would stamp them and they would get signed.”
“Who would sign them?”
“Other people on the team that could sign the signature of the person or just a check on there or whatever.”
Cheryl Samons, whom Ice Legal deposed earlier, instituted this system. Though she had exclusive signing authority for many lenders, three different people regularly penned Samons’s name, Tammie Lou explained. Paralegals sat around a big table and signed as witnesses and notaries in assembly-line fashion, placing the documents in a folder for Samons. Nobody read anything, just signed. This happened on six floors of the office, every single day. The fourth-floor mass signing sessions took place right outside David Stern’s office; it was impossible for him to plead ignorance. Tammie Lou got fired because she refused to falsify military documents used in process service; two weeks later, she was told to pack up. Nobody challenged the situation because everybody knew the consequences. Question the system and you’re out.
June and Theresa leaked the deposition, hoping to heighten interest in the Stern case and bring more people forward to testify. Michael posted it at 4closureFraud. The state prosecutors sent another deposition later, with Kelly Scott, one of Cheryl Samons’s former assistants. Within a week Fannie Mae and Freddie Mac, amid pressure from Congress, terminated referrals to Stern for cases in Florida. Citigroup and GMAC followed suit. That wiped out a large chunk of the company’s business. But seeing Stern crumble financially wasn’t enough for the activists. They wanted indictments.
June and Theresa had data coming in from Lynn and Lisa. But they also received information from just about everyone involved in a case with foreclosure mills, LPS, or DocX. They were early movers in a rapidly growing scandal. Assistant attorneys general in Nevada, California, and Ohio traded information with them. Regulators started visiting the office. The banks called them, lobbying for leniency. June and Theresa’s superiors sup
ported their efforts; they even formally reprimanded Erin Cullaro for her foreclosure mill moonlighting (though, amazingly, she kept her job for another year). But just as June and Theresa verged on announcing indictments, their boss changed.
Foreclosure fraud’s blast into the public consciousness coincided with the 2010 midterm elections. Democrats, from congressional leaders Harry Reid and Nancy Pelosi on down, pounced on the issue, demonstrating concern for struggling homeowners. Thirty-one California House Democrats cosigned a letter calling for a federal criminal investigation and attaching twenty pages of horrific case studies from constituents—tales of dishonesty and misrepresentation. Alan Grayson wanted foreclosure fraud monitored by the Financial Stability Oversight Council, a new super regulator created by the Dodd-Frank reform law, as a systemic risk. But Republicans had little interest in the story, save for a few in hard-hit foreclosure areas. Their electoral strategy instead focused on Obamacare and allegations of presidential lawlessness.
When the scandal broke, Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, thought the government should capitalize on its leverage with legally exposed servicers. She drafted a proposal called the “super-mod,” which would take every loan over sixty days delinquent and write it down to face value. Borrowers would have a shot at making reduced payments, and lenders would get a share of the upside as home values appreciated, giving them a stake in neighborhood stability. Bair formally sent the proposal to Treasury Secretary Timothy Geithner. It never went anywhere.
The White House took foreclosure fraud seriously enough to convene a high-level economic meeting in the Roosevelt Room. President Obama asked National Economic Council director Larry Summers about robo-signing, and he assured the president that there was no systemic threat to the economy. Around the room they went, everyone agreeing with Summers: a mild problem, nothing existential. Finally Obama pointed to newly minted assistant Elizabeth Warren, whom one of his staffers invited. She expressed much stronger concern, laying out how foreclosure fraud covered up a larger crime, deeply damaging homeowners and investors and putting the housing market at risk. But the rest of the group moved on to the next topic. It was one of the few times Warren would get into a presidential-level meeting; Summers tried to keep her away after that.