The rise and fall of a foreclosure king
MICHELLE CONLIN, AP Business Writer
Monday, February 7, 2011
FORT LAUDERDALE, Fla. (AP) — During the housing crash, it was good to be a foreclosure king. David Stern was Florida’s top foreclosure lawyer, and he lived like an oil sheik. He piled up a collection of trophy properties, glided through town in a fleet of six-figure sports cars and, with his bombshell wife, partied on an ocean cruiser the size of a small hotel.
When homeowners fell behind on their mortgages, the banks flocked to “foreclosure mills” like Stern’s to push foreclosures through the courts on their behalf. To his megabank clients — Bank of America, Goldman Sachs, GMAC, Citibank and Wells Fargo — Stern was the ultimate Repo Man.
At industry gatherings, Stern bragged in his boyish voice of taking mortgages from the “cradle to the grave.” Of the federal government’s disastrous homeowner relief plan, which was supposed to keep people from getting evicted, he quipped: “Fortunately, it’s failing.”
The worse things got for homeowners, the better they got for Stern.
That is, until last fall, when the nation’s foreclosure machine blew apart and Stern’s gilded world came undone. Within a few months, Stern went from being the subject of a gushing magazine profile to being the subject of a Florida investigation, class-action lawsuits and blogger Schadenfreude that, at last long, the “foreclosure king” was dead.
“What Stern represents is an industry that was completely unrestrained, unchecked, unpunished and unsupervised,” says Florida defense attorney Matt Weidner. “This was business gone wild.”
The rise and fall of Stern, now 50, provides an inside look at how the foreclosure industry worked in the last decade — and how it fell apart. It also shows how banks, together with their law firms, built a quick-and-dirty foreclosure machine that was designed to take as many houses as fast as possible.
Not long ago, the world of back-office bank procedures was of little interest to the public. But revelations last fall about robo-signers powering through hundreds of foreclosure affidavits a day, without verifying a single sentence, changed all that. Today the banking industry’s eviction juggernaut is under intense scrutiny as allegations of systemic foreclosure fraud mount.
The 50 state attorneys general are conducting a foreclosure industry probe. So are state and federal regulators. Class-action lawsuits are gathering force, and, with increasing frequency, state judges are tossing out foreclosure suits in favor of homeowners. The developments are prolonging the housing market depression, casting doubt on mortgage ownership and calling into question whether mortgage-backed securities are, in fact, backed by nothing at all.
The Florida attorney general’s economic crimes division is investigating three law firms, including Stern’s, over allegations that they created fraudulent legal documents, gouged homeowners with inflated fees, steered business to companies they owned and filed foreclosures without proving the bank actually had a legal interest in the loan. Florida authorities characterize the foreclosure process at these law firms as a “virtual morass” of “fake documents” and depicted Stern’s operations as something akin to the TV show “Lost” — only instead of people that went missing, it was paperwork. Stern’s employees churned out bogus mortgage assignments, faked signatures, falsified notarizations and foreclosed on people without verifying their identities, the amounts they owed or who owned their loans, according to employee testimony. The attorney general is also looking at whether Stern paid kickbacks to big banks.
“There’s a David Stern in every state, sometimes more than one,” says Jacksonville Legal Aid attorney April Charney, who has successfully stopped foreclosure for hundreds of Florida families.
Stern denied repeated requests for comment. He did not answer inquiries at his office or at his main residence in Fort Lauderdale. Stern’s lawyer, Jeffrey Tew, agreed to an interview in late December at his Miami office, then canceled it the night before without further comment.
Stern’s story, starting with his law degree in 1986 from the South Texas College of Law, can be pieced together through thousands of pages of court documents, myriad depositions and scores of interviews.
After working at a law firm for mortgage lenders, Stern started his own practice in Fort Lauderdale in 1994. Four years later, he got a massive break: the mortgage giant Fannie Mae, a government-backed agency that provides market stability for mortgage lenders, named Stern to its exclusive attorney network. That meant Fannie directed banks to use Stern’s firm when foreclosing in Florida. Fannie also named Stern Attorney of the Year in 1998 and 1999. Employees from that era remember an office that liked to party together. Stern enjoyed dressing up for his office bashes. One time he sauntered on stage turned out like Michael Jackson.
Almost from the beginning, Stern faced trouble. In 1998, he was named in a class-action lawsuit alleging that he padded fees on foreclosed homeowners. Stern settled for $2.2 million. According to legal testimony at the time from a Fannie Mae official, Fannie was warned about troubles at the Stern firm. But Fannie continued referring cases to Stern. Fannie Mae spokeswoman Amy Bonitatibus says, “At all times, Fannie Mae has had a reasonable expectation that our servicers and the law firms adhere to proper procedures and conduct under the law. In instances where we learn that servicers or law firms are not adhering to our requirements or applicable law, we immediately engage and take appropriate action, which may include termination.”
Soon after, Stern was sued again, this time for sexual harassment. A former paralegal alleged that Stern created a “sexually-laden” atmosphere in which he routinely “touched and grabbed and subjected to simulated intercourse” his employees. Stern settled that suit in 2000 for an undisclosed amount.
By this time, lawyers and homeowner activists were also warning lenders, federal regulators and the Florida Bar about Stern. In 2002, the Florida Supreme Court reprimanded Stern for submitting “potentially misleading” fee affidavits.
None of the accusations stalled the firm’s steroidal growth. After the economy crashed in the fall of 2008 and ravaged the housing market, Florida, along with Nevada, Arizona and California, became foreclosure central. Stern’s caseload rose from 15,000 foreclosures in 2006 to 70,400 in 2009. His staff tripled to more than 1,200. To keep up with demand, Stern set up offices in the Philippines. When the U.S. staff responsible for entering bank data in the foreclosure files logged off, the offshore workers logged on.
Revenue swelled from $41 million in 2006 to $260 million in 2009, according to an SEC filing. The firm moved into a plush, marble-floored headquarters near Miami that was all glass and fountains. By now Stern was driving a Bugatti and had bought at least $60 million in property, including a 16,000-square-foot island compound that sits behind two security gates.
But all the paperwork Stern’s firm was cranking out to make this fortune would soon come back to haunt him. The foreclosure business is a volume game. Banks typically pay law firms like Stern’s about $1,400 for each successful foreclosure. But the banks can pay a lot less if the firm doesn’t successfully foreclose within a certain time frame, usually around six months.
With so many foreclosures flooding in, Stern’s firm couldn’t keep up. Stern took shortcuts by hiring the young and cheap. “The girls would come out on the floor not knowing what they were doing,” says Tammie Lou Kapusta, who worked in Stern’s foreclosure department in 2008 and 2009. “Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to original documents.”
Employee depositions paint a picture of a firm under constant pressure from the banks to move faster. The longer it took to foreclose, the more money the banks stood to lose. Like so many in the industry, Stern had a strategy to cope with all the volume and velocity: robo-signing. One employee testified that Stern’s chief lieutenant, a one-time file clerk named Cheryl Samons who rose to become the firm’s chief operating officer, signed as many as 1,000 foreclosure affidavits a day without reading a single word. The employee said Samons’ hand got so tired that she told three other employees to forge her signature. Samons also signed numerous mortgage assignments with a notary stamp that didn’t even exist at the time of signing. Notary stamps are only valid for four years. The only way Samons could have signed mortgage assignments at the time they were supposedly notarized was if she had been capable of time travel.
Stern rewarded Samons with a new BMW SUV every year, paid all her bills and took care of the mortgage payment on her home, according to testimony from two employees. Samons did not respond to request for comment.
Billings surged. So did the dysfunction.
Kapusta testified that she received 100 phone calls a day from people who never received their foreclosure notices or who wanted loan modifications but couldn’t get through to the banks. If she talked too long on the phone, Kapusta testified, Samons would yell at her. “Everything was about getting the judgment entered because we had to report to the banks,” Kapusta said.
Stern battled to keep the chaos inside his firm a secret. In 2008 and 2009, whenever the Fannie Mae auditors were about to touch down in Miami for their routine monitoring, Stern’s employees sometimes toiled through the night, ripping the stickers and client codes off of Fannie files and replacing them with those of a different lender. Then, as an extra precaution, they hauled the disguised files to a remote back room.
Stern then gave Fannie officials the white-glove treatment, with catered meals and chauffeuring. The incomplete files stayed hidden until the auditors left town.
Fannie Mae’s Bonitatibus says that, “To our knowledge, no one at Fannie Mae has had their expenses paid by the Stern Law firm.”
Early 2010 brought Stern’s biggest coup. He spun off a chunk of his business called DJSP that performed mortgage process services like title searches and lien monitoring and took it public. The deal reportedly made Stern $146 million, including $55 million cash.
DJSP stock started trading in January at about $10 a share. Within months, battered by rumors of indiscretions at Stern’s firm, it was worth half. On July 20, two investors filed a securities-fraud class action alleging that Stern knowingly misled them by failing to disclose the problems within the business. “DJSP was a scam,” says Bill Warner, a Sarasota private eye who successfully defended himself against a foreclosure suit brought by Stern.
At the end of July, Florida attorney Kenneth Trent, who had blocked Stern from foreclosing on a homeowner who was current on his mortgage, filed a federal lawsuit against Stern’s firm under a statute normally reserved for gangsters, the Racketeer Influenced and Corrupt Organizations Act--or RICO. Days later, the Florida attorney general launched an investigation against Stern’s firm and three other foreclosure mills. The AG’s arguments were similar to those brought in Trent’s class action.
At first, Stern railed against the media, saying he would defend the company and its reputation against the allegations. Then, in September, he dropped out of sight. Equally elusive is Cheryl Samons, who is no longer with the firm. She left no contact information.
In October, one by one, the megabanks started to withdraw their cases from Stern’s firm. Fannie fired Stern on Oct. 22. Stern’s staff of 1,200 has dwindled to 200. DJSP’s stock, worth as much as $13 in April, now trades for pennies.
The firm’s fall has spawned more chaos in Florida’s circus-like foreclosure courts. A slew of homes Stern foreclosed on that sold for $240,000 each during the credit bubble sold at auction as orphaned cases for $200. Recently, even the most infamous “rocket docket,” in Lee County, where judges were reported to have signed off on a foreclosure every 30 seconds, ground to a virtual standstill as the Stern firm withdrew from case after case. Some of Stern’s remaining lawyers show up court with greasy hair, fleece jackets and food-stained clothing. As for Stern, if federal and state prosecutors file criminal charges, he could end up in prison.
Meanwhile, Stern’s payment on his $12 million line of credit with Bank of America is late. So is the rent on his headquarters.
He’s now in default.