Raising questions for the first time about the role of Fannie Mae and Freddie Mac in the unfolding mortgage-foreclosure crisis, the two government-owned giants are reviewing the work of a Florida law firm they recommended to process foreclosures.
Until now, Fannie and Freddie have been largely bystanders in the widening foreclosure scandal, because they don’t directly service loans, or handle day-to-day management of mortgages. But their use of so-called foreclosure mills, law firms that specialize in quickly processing thousands of foreclosures on behalf of lenders, is dragging the companies into the latest crisis.
Last Friday, Freddie told mortgage servicers to stop sending cases to the Law Offices of David J. Stern, of Plantation, Fla. Fannie followed suit on Monday. The law firm has been at the center of recent allegations by the Florida attorney general’s office, which released a deposition of a former law-firm employee. In the deposition, the employee alleged the firm routinely forged notarized documents amid closed-door screaming matches that broke out because files weren’t moved fast enough.
The employee, Tammie Lou Kapusta, didn’t return calls for comment. Jeffrey Tew, a lawyer for the Stern firm, declined to comment about the review by Fannie and Freddie. But he said Ms. Kapusta was fired by the firm. “The firm thinks her allegations are incorrect and not true,” he said.
Fannie and Freddie have hired separate firms to review the foreclosures handled by Stern’s offices. Fannie also began conducting audits of all nine Florida law firms in its retained attorney network earlier this year, said people familiar with the matter.
“Obviously, a lot of issues have been raised about this firm,” said Brian Faith, a Fannie spokesman. “We thought it was appropriate and responsible to suspend new referrals to the firm while we undertake our review.”
The Florida firm processed more than 70,000 foreclosures last year, and Mr. Stern was named “attorney of the year” by Fannie in 1998 and 1999, according to his biography.
While Fannie conducts regular audits of its approved attorneys, it said that mortgage servicers that select the firms are ultimately responsible for ensuring foreclosures are done properly. Fannie also said it was preparing to add more attorneys in Florida, which has been hard hit by foreclosures and requires that courts process them.
Fannie and Freddie don’t actually issue mortgages, but purchase them from banks and sell them to investors as mortgage-backed securities, providing guarantees to cover losses in the event of default. While they rely on banks and other firms to service those loans, they helped build the framework for managing those loans. They provide lists of approved vendors to handle everything from issuing foreclosure filings to selling homes.
In recent weeks, mortgage servicers, including units of major banks such as Bank of America Corp. and Ally Financial Inc., have suspended thousands of foreclosure proceedings across the nation after the companies discovered that some documents didn’t follow proper procedures.
The delays are an unwelcome development for Fannie and Freddie, because carrying costs will mount on their stable of foreclosed and vacant properties. This summer, Fannie warned servicers that they could face fines if foreclosures became unreasonably prolonged.
The push to keep up with the rising tide of foreclosures has exposed sloppy practices across the mortgage-servicing industry, analysts say. “They’re just overwhelmed,” said Todd J. Zywicki, a law professor at George Mason University in Fairfax, Va.
Banks and other mortgage owners stand to lose $1,000 for each month that a foreclosure is delayed, according to estimates by Paul Miller, an analyst at FBR Capital Markets. If all foreclosures are delayed for three months, that could lead to $6 billion in losses across the industry, with around half of those falling on Fannie, Freddie and government agencies such as the Federal Housing Administration.
“The final losses for Fannie and Freddie will be more expensive than we anticipated” due to the current crisis, said Mr. Miller.
Fannie and Freddie have received $148 billion from the federal government so far to stay afloat. The giants’ federal regulator says banks and other servicers will foot the bill for costs that result from the foreclosure suspensions.
But the decision to suspend referrals to the Stern firm could complicate questions about who could ultimately bear the costs of any delays. “If they weren’t monitoring their lawyers, it would strike me that while they might try to reach back at some of the other originators, the buck stops with them,” said Mr. Zywicki.
Last week, a deposition of Ms. Kapusta, the former Stern paralegal, was released by the Florida attorney general, who conducted the deposition on Sept. 22.
The attorney general, Bill McCollum, announced he was investigating four firms, including the Stern firm, for presenting “fabricated documents” that allegedly used inaccurate or incomplete information for foreclosure proceedings against borrowers. All four have been approved by Fannie, and three by Freddie, to do business on behalf of their servicers. The companies have only suspended referrals to the Stern firm.
The Stern firm is challenging the attorney general’s jurisdiction in court.
Ms. Kapusta’s nearly two-hour sworn deposition details how documents were allegedly prepared by the Stern firm. Ms. Kapusta, who worked at the firm from spring 2008 to July 2009, described in detail a law firm where employees felt under pressure to quickly process foreclosure documents through the courts. In her deposition, Ms. Kapusta alleges borrowers were not served with foreclosure papers correctly, documents contained inaccurate information about the borrowers’ debt and documents were backdated or not filed correctly.
“I know that people had left because they were uncomfortable with the things that they were being asked to do,” Ms. Kapusta said in her deposition.
In the deposition, Ms. Kapusta said she was fired from the firm, which had more than 1,000 employees. “They terminated my employment and said it wasn’t working out,” she said, adding that termination came after she refused to process paperwork in an improper way.
Doug Lyons, Ms. Kapusta’s lawyer, said it was unfair that Ms. Kapusta was being portrayed as a disgruntled employee, because she was simply testifying after being subpoenaed by the attorney general’s office. “She was sworn to tell the truth.”
Ms. Kapusta handled files for Fannie and Freddie, according to her deposition.
When Fannie came to the Stern law firm to check on the processing, “We would all have to be under strict dress code and emails would go out that Fannie was in the office,” Ms. Kapusta said. Fannie and Freddie have guidelines that require, for example, that documents reflecting the transfer of ownership be dated on the exact day of the transfer.
But Ms. Kapusta said that to meet those guidelines, documents were backdated. “They’d come in and audit,” Ms. Kapusta said, “so we’re just typing in what they want to see. It’s not necessarily what actually occurred. That’s what we were told to do.”
Fannie and Freddie declined to comment on the deposition.
On Wednesday, attorneys general in 50 states said they would launch an investigation into the foreclosure filings and procedures of all major loan servicers.