Litigation

Fannie and Freddie Back Pedal From Stern Law Firm in Florida

By Angel Reyes

Wall Street Journal

NOVEMBER 3, 2010
Fannie, Freddie Cut Ties to Law Firm
By NICK TIMIRAOS

Fannie Mae and Freddie Mac terminated their relationships with a top Florida foreclosure attorney on Tuesday, one day after the companies began taking back loan files from the firm that has processed thousands of evictions on behalf of the mortgage-finance giants.

Fannie and Freddie dispatched employees on Monday afternoon to begin removing loan files from the law offices of David J. Stern in Plantation, Fla. Those files are needed to process foreclosures, which must be done through courts in Florida.

Fannie and Freddie said they would begin redistributing the files to other local attorneys in a bid to resume evictions. Last month, the companies suspended all foreclosures that had been referred to the Stern law firm and had directed mortgage servicers, which handle day-to-day loan management, to stop sending new foreclosure and bankruptcy cases to the firm.

Jeffrey Tew, a lawyer for the Stern firm, declined to comment and a spokeswoman for Fannie declined to elaborate.

A spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step on Monday of beginning to remove loan files after an internal review raised "concerns about some of the practices at the Stern firm." She added that Freddie Mac took possession of its files "to protect our interest in those loans as well as those of borrowers."

The Stern law firm has been at the center of allegations by the Florida attorney general's office of improper foreclosure practices and is one of four firms under state investigation. The office has released depositions of former law-firm employees who have alleged that the firm forged notarized documents and that employees signed files without reviewing them in an effort to speed through foreclosure filings.

In those depositions, former employees testified that the firms would go to great lengths to conceal improper practices during regular audits by Fannie and Freddie. A lawyer for Mr. Stern has dismissed the allegations as falsehoods made by disgruntled employees.

The mortgage bust had been good for business at the Stern firm, which last year processed more than 70,000 foreclosures. In December, the firm also spun off its foreclosure-servicing business, rechristened as DJSP Enterprises Inc., as a publicly traded company that is listed on the Nasdaq Stock Market. Mr. Stern was named "attorney of the year" by Fannie in 1998 and 1999, according to a biography included in DJSP filings. In trading Tuesday, the stock closed at 85 cents, down 9.6%.

But the boom in casework also attracted increased scrutiny from local consumer advocates and attorneys that uncovered examples of improper notarizations. In August, the Florida attorney general announced it would investigate Mr. Stern's firm and three other so-called foreclosure mills. In September, three members of Congress called on Fannie and Freddie to investigate the firm's practices.

Last month, Fannie and Freddie said they had begun conducting independent reviews of the Stern firm. Without any new business, the firm has been forced to lay off hundreds of employees. On Tuesday, Fannie and Freddie said the firm was cooperating fully with efforts to repossess loan files.

Fannie and Freddie don't directly manage defaulted loans, but instead rely on banks and mortgage servicers to do the work for them. Since the mid-1990s, Fannie and Freddie have used a designated-attorney model that provides lists of law firms that the servicers can use on behalf of the companies.

Attorneys are paid based on the volume of cases they complete. Some attorneys have criticized that flat-fee structure and say it encourages Fannie, Freddie, and its servicers to send the most business to those that foreclose the fastest.

Last week, Fannie said it was in the process of adding as many nine law firms to its legal network in Florida, doubling the current number of approved firms. 

Full post as published by Angel Reyes Blog on November 03, 2010 (boomark / email).