Why sloppy foreclosure process could ruin Florida

Article Courtesy of The St. Petersburg Times

By Robert Trigaux

Published October 6, 2010

There's no polite way to put this. A growing cancer is infecting the backlogged legal process of foreclosing on hundreds of thousands of homes in Florida.

It's endangering the legal and economic stability of this state. And it's exposing an appalling lack of leadership, first for allowing such a breakdown in the legal system and, now, for failing to own up to this mess and get it fixed.

How bad is it? Laws governing who actually owns a foreclosed home are becoming so suspect a new buzzword is emerging: blighted titles. Even the tepid rebound of Florida's economy may face crippling delays in resolving hundreds of thousands of foreclosures in the Sunshine State.

What's wrong? The accuracy and truthfulness of an immense flood of legal documents and affidavits some lenders and their hired lawyers use to foreclose on homes have come under such critical attack that some major banks are suspending their court cases pending internal reviews.

"Sheer volume allowed perversions in the legal system to be overlooked," says Mark Stopa, a Tampa lawyer who helps people fight foreclosures.

"This has long-term catastrophic consequences," adds St. Petersburg lawyer Matt Weidner. He wants an intervention into what he considers a corrupted legal process.

At best, the foreclosure process in Florida is beyond sloppy. At worst, it may suffer from serious fraud. Left unchecked, a growing chorus of critics warns this cancer may have sweeping consequences.

Here's a big one: Title insurance companies may be scared away from offering "clear title" guarantees on foreclosed homes. That would throw into doubt who actually owns many thousands of houses those going into foreclosure and those purchased out of foreclosure all across the state.

Who's going to buy a home if they don't have a guarantee that they will legally own it?

If the courts finally acknowledge that many foreclosure documents are inaccurate, people who have bought thousands of foreclosed homes may have to reassert their legal ownership. Some former owners already pushed out of their homes by foreclosure proceedings could find they still own their houses, only to face a second round of foreclosure just to get the ownership documentation right.

The impact of this mess is not limited to foreclosures, which make up a third of area home sales. It threatens Florida's mainstream housing market by making it harder to reach any sort of price stability. Wary buyers will remain on the sidelines until they know the value of what they intend to purchase won't collapse.

Even the credibility of the state's court system could be questioned. Pressured by legislators (who control the court system's budget) to clear Florida's huge foreclosure backlog, many judges employ what derisively are known as "rocket" dockets. They speed foreclosures by minimizing legal arguments. But in the name of expediency, they bend the rules governing individual property rights.

Ultimately, the foreclosure mess could stall Florida's still struggling economy and, worst case, revive the possibility of a double-dip recession.

Florida's foreclosure train is not slowing. Tampa Bay, Miami and Orlando are among the top five metro markets nationwide with the fastest-growing mortgage delinquency rates a harbinger of coming foreclosures.

Last week, lender JPMorgan Chase said it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions are in the 23 states where foreclosures must be approved by a court, including Florida. Chase mortgage supervisor Beth Ann Cottrell said in a court deposition that she was among eight managers who together signed without any personal review about 18,000 documents a month including critical affidavits of indebtedness.

Last month, GMAC Mortgage, the country's fourth largest home lender, said it was suspending an undisclosed number of foreclosures to give it time to take a closer look at its own procedures. GMAC (majority owned by the federal government after a recent bailout) simultaneously began withdrawing affidavits in pending court cases, throwing their future into doubt.

GMAC employee Jeffrey Stephan said he and a team of 13 others signed an estimated 10,000 foreclosure-related documents a month. Similarly, Erica Johnson-Seck, an employee of OneWest Bank, estimated she signs about 750 foreclosure-related documents a week and spends about 30 seconds on each document.

And just Friday, Bank of America said it, too will delay foreclosures in Florida and 22 other states after disclosing a bank official signed off on 8,000 foreclosure documents a month without reading most of them.

Cottrell, Stephan and the other officials are now known as "robo-signers" people who are supposed to know what's in the affidavits they sign off on, but are so under the crush of foreclosure volume that they are, in effect, robotlike signature-signers of key documents they never read.

A backlash to GMAC is already under way. Old Republic National Title last week instructed its offices not to provide title coverage to any properties foreclosed on by GMAC.

Already, Moody's says it may downgrade the servicer ratings of GMAC and Chase.

Sarasota lawyer Richard Kessler conducted a study that found errors in about 75 percent of court filings tied to home repossessions. "Defective documentation has created millions of blighted titles that will plague the nation for the next decade," he told Bloomberg News.

In the courts, a few judges worry about the problem.

"I don't want to say that every one of these cases is wrong and a fraud on the court, but it is a big concern for us," J. Thomas McGrady, chief judge of the Sixth Judicial Circuit in Florida, which handles cases in Pinellas and Pasco counties, told the New York Times after GMAC's announcement. Pinellas County alone is dealing with 33,000 cases in the foreclosure pipeline. Statewide, there are more than half a million cases.

Yet many judges are fixated on clearing clogged dockets. Some lawyers gripe about "kangaroo courts" that have largely abandoned judicial process.

Some legislators are pushing for solutions. But most are eager to put a rush on foreclosures in a simplistic belief that speedy resolutions will quicken Florida's economic recovery.

Quite the opposite. If tens of thousands of foreclosures are proved bogus by shoddy legal process, many will have to be done over. Others may face additional litigation for screwing things up in the first place.

Democratic Congressman Alan Grayson of Orlando recently wrote the Florida Supreme Court, saying, "taking someone's home should not be done lightly." He asked the court to halt foreclosure proceedings for flawed paperwork brought by the most active "foreclosure mill" law firms in the state. Four firms are already under investigation by the Florida Attorney General's office. They are the Law Offices of David J. Stern, the Law Offices of Marshall C. Watson, Shapiro & Freeman and Florida Default Group.

In response to Grayson, the state Supreme Court punted, saying it lacked the authority to get involved. The court referred the official to the Florida Bar to investigate any allegations.

I won't hold my breath on that referral. We're beyond simple remedies or toothless inquiries. Watch the issue of "blighted titles" balloon into an economic nightmare that may require a larger-scale, legislative-legal bailout of its own.

Hey, we're getting used to such sweeping rescues, right?