Lost in the system that took the house

By Ariana Eunjung Cha and Brady Dennis
Washington Post Staff Writers
Tuesday, September 28, 2010; 11:06 PM

Luis Fernandez's foreclosure documents never looked quite right.

Critical papers regarding his Orlando home were missing dates, and some signatures appeared to him to be forged. The mortgage had been sold so often - including once in the middle of the foreclosure process - that at times it was hard to tell which company was trying to seize the house. He challenged the foreclosure in court but failed.

Now, as Fernandez seeks to appeal his eviction and get his home back, he has learned that the law firm representing the banks is under investigation for fabricating foreclosure documents. And his file was signed by Jeffrey Stephan, a document processor who made headlines last week for approving what could be hundreds of thousands of cases without verifying whether the foreclosures were justified.

Fernandez says he longs for the days when homeowners knew the bankers holding their mortgage and could work out a compromise when hard times hit. Today, he said, it's like "fighting a machine." "You feel like you're alone and getting beaten up by the system," said Fernandez, 59, who missed three monthly payments after a heart attack nearly ruined his greeting card business.

Fernandez's story provides a glimpse into the bureaucratic maze his foreclosure is caught in, along with millions of others working their way through the nation's courts in the wake of the financial crisis. It is a system rife with shoddy documents, forged signatures and, some state law enforcement officials allege, outright fraud by lenders eager to rid themselves of bad loans.

As more of these practices are coming to light, the entire foreclosure system is facing the threat of grinding to a halt. Connecticut, California and Colorado have frozen all foreclosures by one major lender, and other states are pondering whether to follow suit.

The vast majority of families facing foreclosure do not fight their lenders. But that may change as a growing number of homeowners are contending in lawsuits that the process appears so flawed that they have the right to challenge their cases, even as they admit to missing payments.

Economists say such a trend threatens to overwhelm an overburdened legal system struggling to handle the aftermath of the housing collapse, as well as delay a correction in home values that the real estate market desperately needs to return to normalcy.

Legal experts say many homeowners may have legitimate cases, and even lenders in some instances are withdrawing foreclosure documents for fear that they might not hold up if challenged.

The deep flaws in the foreclosure process came clear last week after Stephan, an employee of Ally Financial's GMAC mortgage unit, admitted in a sworn deposition that he signed off on up to 10,000 foreclosure documents a month for five years without reviewing them thoroughly. That prompted Ally, which took a $17 billion federal bailout and is majority-owned by the government, to halt evictions in 23 states last week. Stephan also signed foreclosures for hundreds of other mortgage companies, including J.P. Morgan Chase.

A picture is emerging is of an industry - from loan officers in local offices in neighborhood strip malls to the financial titans of Wall Street - eager to purge bad mortgages from its books. To speed that process, documents and signatures were forged, notary witnesses were faked and those responsible for checking court filings never read the massive stacks that passed across their desks at a breakneck pace, attorneys and law enforcement officials say.

Some problems, such as a misplaced signature or an incorrect date, are treated like minor technicalities by judges who suspect that homeowners' attorneys are trying to buy extra time for clients who are facing eviction.

But lawyers and law enforcement officials in a handful of states contend that they have found far more serious examples of fraud. These officials argue that the companies filing foreclosure claims often did not have legal standing to kick people out of their homes and used forged paperwork to cover their tracks. Problems with foreclosures have caught the attention of attorneys general in Texas, North Carolina, Ohio, Iowa, Illinois and Florida, among other states.

During the housing boom, investment banks and hedge funds constantly packaged and repackaged mortgages into massive securities that could be traded just like stocks. This mechanism, fueled by the tremendous appetite to make money off mortgages among Wall Street investors, ensured there would be enough financing available to offer a mortgage to almost anyone who wanted one.

But in the wake of the housing bust, the constant shuffling of loans has left a baffling paper trail and, at times, confused even big lenders about who has ownership over a mortgage. In Pinellas County, Fla., for example, two banks tried to foreclose on the same house, just one of several similar cases that are being highlighted by homeowners' attorneys across the country.

"Something's not right here," said Michael Holmes, a 56-year-old real estate agent whose house in Belfast, Maine, is in foreclosure. "When you make phone calls, you can never speak to anyone who can speak to anything you needed. And when you send in paperwork, you don't get a response."

Despite evidence of such problems, some judges focus solely on whether a borrower missed their monthly payments.

John Kenneth Hautman, a D.C. area lawyer, says the statement by Stephan and other processors that they are not checking the foreclosure files they are signing raise doubts about the documents' accuracy and authenticity. It's possible that some people who should have kept their homes are now on the streets.

Hautman made these arguments when defending a couple facing foreclosure in Potomac. But the judge brushed off the concerns, he said.

Hautman said he was shocked. "Signing an affidavit saying you have personal knowledge when you don't is perjury," he said.

"No one has responsibility of oversight for the foreclosure process," Hautman said. "It's totally run amok."

On his quiet block in Orlando, Fernandez had no idea his loan had been traded from bank to bank. J.P. Morgan Chase and its document processor, Ally, served him his papers. But months later the loan was transferred yet again to Bank of New York Mellon Trust.

When Fernandez looked closer at his paperwork, he grew even more puzzled. The document that showed what Fernandez owed on his loan didn't have a date on it, which legal experts say would be highly irregular. And the file did not show when his loan had been transferred between banks.

If Fernandez's documents were forged, it is unclear who would have done so and for what purpose. Housing experts say in general, fabricated foreclosure documents often indicate that banks and document processors have lost track of the papers that prove who owns a loan.

When Fernandez tried to ask the banks about his file, he was referred to a local company called the Florida Default Law Group, which gave him vague answers. He later learned this law firm was under investigation by state law enforcement for fabricating foreclosure documents.

Lisa Nason, a spokeswoman for the Florida Default Law Group, said the firm will not comment on active cases. In regards to the state investigation, she said the company is "confident it will continue to be vindicated as a high-quality law firm."

Ally spokesman James Olecki also declined to comment about individual cases, but he said his firm is "confident that the processing errors did not result in any inappropriate foreclosures." Ally, he added, is no longer sending new referrals to Florida Default Law Group.

J.P. Morgan Chase and Bank of New York Mellon declined to comment.

Until his eviction, Fernandez was confident he could work out a plan to keep his home. He and his wife, Miriam, had missed three payments while he recovered from a heart attack and quintuple-bypass surgery, but they had at least $50,000 of equity in the home they had bought for $180,000. Surely the bank would let them tap into that equity to make up their missed payments.

Fernandez drafted and filed an affidavit challenging his foreclosure, but when he missed the ensuing court date, a judge ruled in favor of the lender. Case closed.

In February, the house was sold to an investor for $79,000. In April, Fernandez and his wife were evicted. They didn't have the courage to tell their daughters, who are grown and live elsewhere.

While Fernandez's business has revived, he and his wife are homeless. These days, they drift from motel to motel in central Florida, determined to keep fighting for a home they feel they never should have lost. Their lodging costs come to about $1,000 a month, only a shade less than the $1,200 monthly payment they used to make on the home that somebody else now owns.

chaa@washpost.com dennisb@washpost.com

Research editor Alice Crites and staff researchers Magda Jean-Louis and Julie Tate contributed to this report.

© 2010 The Washington Post Company