By Abigail Caplovitz Field | January 18, 2012
My last post detailed how the Justice Department abandoned the principle of equality before the law in its Financial Meltdown enforcement efforts. This post focuses on Justice’s efforts–and lack thereof–to defend our legal system and the rule of law it relies on.
The Buck Stops with Holder and Obama
A couple of housekeeping notes, repeated from part 1: Many at Justice and in the FBI are ethical and moral people who try very hard to do right by the American people. So even though I use the word “Justice” as in Justice Department throughout, my critique does not apply to the people below the very top. Fundamentally only Attorney General Eric Holder and President Obama are responsible our Department of Justice’s enforcement priorities.
Attorney General Holder runs the show, but President Obama gave him the job, and can fire him at any time. Holder’s enforcement priorities and strategies therefore must reflect Obama’s priorities. I realize that’s a very formal take, but it’s the only defensible one. I don’t care how much who knew about what, how decisions are or were in fact made, or any other framing or excusing of AG Holder & President Obama’s responsibility for our criminal justice priorities. In our democracy the only political control We, the People have on our national criminal enforcement priorities is our vote for President. And an incumbent President’s strongest advertisement of his enforcement priorities is his Attorney General and his record. The buck stops with them, period.
Another important caveat about this critique: I’m only looking at all things Financial Meltdown. In this part two I look at Justice’s defense of our legal system, of the rule of law itself. While Justice is responsible for many other topics–combating terrorism, for example–the Financial Meltdown devastated our economy, deranged our democracy and destroyed trillions of dollars of ordinary Americans’ wealth. So though I’m only grading one subject, it’s not a gotcha quiz. Nor does it say anything about Justice’s performance in those other areas.
Nor am I rigging the test: Justice itself defined the standard for judging it. The Justice Department’s Mission, as spelled out in its “Performance and Accountability Report 2011” is:
“To enforce the law and defend the interests of the United States according to the law, to ensure public safety against threats foreign and domestic, to provide federal leadership in preventing and controlling crime, to seek just punishment for those guilty of unlawful behavior, and to ensure fair and impartial administration of justice for all Americans.
And Justice cites these core values in guiding its mission:
“Equal Justice Under the Law….”Honesty and Integrity….
“Commitment to Excellence….”Respect for the Worth and Dignity of Each Human Being….”
This mission and these values are animated by “Strategic Goals” and the “strategic objectives,” under each (at p. I-2). For Part 2, these are the ones that matter:
“II Prevent Crime, Enforce Federal Laws, and Represent the Rights and Interests of the American People
“2.6 Uphold the civil and Constitutional rights of all Americans
“2.7 Vigorously enforce and represent the interests of the United States in all matters over which the Department has jurisdiction
“2.8 Protect the integrity and ensure the effective operation of the Nation’s bankruptcy system
“III Ensure the Fair and Efficient Administration of Justice
…”3.6 Promote and strengthen innovative strategies in the administration of state and local justice systems”
Measuring Up: The U.S. Trustee Program
Let’s start with “2.8 Protect the integrity and ensure the effective operation of the Nation’s bankruptcy system”. Doing so lets me give Justice (though not Holder and Obama) well-earned praise.
Justice oversees the bankruptcy court system through its United States Trustee program. And some trustees took the systematic inaccuracies and false filings by mortgage servicers very seriously, investigating and participating in cases. In that way they helped build a record that led the Court System to change its rules, giving them much sharper teeth. As O. Max Gardner, a leader in the fight to get servicers to tell the truth in court explained:
“The US Trustee intervention was really a big part of trying to get to the heart of the problem. When the US Trustees got involved, it challenged the credibility of the banks in the eyes of the Court in a way debtors’ attorneys raising the same issues didn’t.”
One big problem the new rules solve is servicer “Gotcha!” games. See, in a Chapter 13 bankruptcy servicers are supposed to tell the homeowner how behind they are, according to the servicer’s math, so the homeowner can catch up, exiting bankruptcy with their home and the promised ‘fresh start’. But instead of giving clear, verifiable numbers, the servicers played games.
Time and again, after the debtor and the court thought the mortgage current and the bankruptcy over, the servicer would say, oh wait, no, you’re still delinquent. Pay us thousands more. These fees were often improper but hard for a homeowner to contest, particularly after the bankruptcy officially ended. This problem was so common the Bankruptcy Court System went through a seven-step, two year process to end it by adding teeth to its rules: perjury penalties, and an Exclusionary Rule. Backed up by those penalties, the new rules fix the problems.
Now when filing a claim, the bank has to say under oath how much the debtor owes, showing its math. That may be tricky for servicers to do, because mortgage servicers’ claims are typically filed by “network attorneys” doing a high volume of cases through back-office employees working for nominal wages at high speed without interacting with the servicer directly. I mean, even prior to these rule changes, the Third Circuit Court of Appeals upheld sanctions on attorneys for filing claims with bad numbers provided by the servicer through Lender Processing Services (LPS). Gardner told me:
“I’ve had attorneys who work on the other side tell me that they’re just not going to sign these things. They’ll get somebody at the servicer to do it. See nobody’s going to pay the lawyers enough money to spend the time to check the numbers, and the lawyers don’t have access to the numbers anyway because of the way the LPS system works. I certainly wouldn’t sign one of these for a servicer.”
And the new rules don’t stop with an honest, sworn accounting at claim filing. The bank has to keep showing its math after the bankruptcy starts. “Post-petition” charges are no longer fertile ground for Gotcha! games.
Finally, at the end of the bankruptcy, when the Court decides the debt is done, the debtor’s fresh start is guaranteed; the servicer can’t come back for anything supposedly owing from before the end of the bankruptcy.
Bottom line on strategic objective 2.8: You did it Justice! Hooray U.S. Trustees and the U.S. Bankruptcy Court System! Thanks to you, servicers have to deal honestly with debtors about how much they owe. At least, that is, in bankruptcy court.
Unfortunately AG Holder and President Obama don’t deserve credit for Justice’s success. See, the U.S. Trustees are a separate institution within Justice. They have their own Director, and he’s in charge of “general policy and legal guidance, oversees the Program’s substantive operations, and handles administrative functions.” And the Director is no political hack; he’s a 30-year civil servant, most of it within the U.S. Trustee program.
Even worse for Holder and Obama, the new rules highlight Justice’s big failure in this department: No big mortgage servicer has been prosecuted for “Bankruptcy Fraud“. Prosecuting criminal bankruptcy fraud is a core Justice function; the US Trustees can only refer for prosecution.
Justice defines Bankruptcy Fraud as
“fraudulent filings in the bankruptcy court; fraudulent transfers of assets; failure to file accurate schedules and statements with the bankruptcy court and false statements in bankruptcy proceedings.”
Given that the servicers’ filings were so frequently inaccurate that the Court had to change the rules to make them stop, why couldn’t Justice find even one major mortgage servicers to charge with bankruptcy fraud? I mean, it’s not like the servicers didn’t know their math was bad. Debtors attorneys proved it many times over.
And Justice does know how to bring these cases; in March it indicted a guy for giving the Court bad numbers: he hid $100k from creditors in his Chapter 7 bankruptcy. No, the mortgage servicers weren’t caging an extra $100k every time. But consider: some 4 million people filed for chapter 13 bankruptcy from 2001-10, inclusive. Let’s say 3/4s had a house to save: 3 million people. So how much did the servicers’ filing of bad math ultimately net?
Well, Gardner says that in his experience, the numbers are wrong in 90% of Chapter 13s with a residential mortgage loan, and the average amount they’re wrong by is $7,775. But let’s be kind to the servicers, and say the numbers are wrong only half the time, and they’re taking only $2,000 they aren’t entitled too. With those generously low numbers, we’re still talking $3 billion over the 10 years. Why is hiding $100k from creditors worthy of prosecution, but defrauding billions from debtors over a decade isn’t? No wonder the Court put teeth in its rules.
Document Fraud: The Big Picture
Let’s do the strategic goal of “fair and efficient administration of justice” next. As I see it, two objectives fit here. One is “3.6 Promote and strengthen innovative strategies in the administration of state and local justice systems.” Unfortunately, Justice never explains what it means by that. (start at page II-29.) So let’s take it at face value, and add in 2.6 “Uphold the civil and Constitutional rights of all Americans.”
One major consequence of the Financial Meltdown is a still-rising, nowhere near crested tidal wave of foreclosures brought by banks that just don’t have their papers straight. Rather than face the legal consequences of failing to comply with their contracts or the law, mortgage servicers (who are often the big banks) are manufacturing–or are having their vendors manufacture--whatever evidence they need to successfully foreclose.
Many find it easy to trivialize document fraud. Routinely stories on document fraud use the term “robo-signing”, which conjures absurd and relatively harmless imagery. Indeed, in Part 1 I likened the rampant document fraud to graffiti in NYC’s murderous decades, important mostly because the ability of vandals to “tag” at will meant the government had lost control and could not keep its citizens safe. But document fraud is deeply harmful in ways graffiti never could be.
Fraudulent documents facilitate theft from Americans, deprive them of their Due Process rights, cloud property titles–perhaps particularly devastatingly in Massachusetts, and obstruct justice. Theft is facilitated by false affidavits of indebtedness. I don’t just mean false as in the person swearing them out doesn’t have the claimed personal knowledge. I mean the numbers are wrong, just like in the bankruptcy courts. When you lie, and ask a court to force a person to pay you more than they owe you, I call that theft.
One easy to see infringement of Due Process rights are fraudulent affidavits of service. “Service” means telling the person you’re suing that you’re suing. When you don’t tell the defendant you’re suing, it’s rather hard for her to defend herself. That’s why it’s illegal, and plaintiffs have to file affidavits swearing the defendant was properly told about the suit. But the Due Process problems go beyond “sewer service.” Florida, at least, exacerbated the problems with “Rocket Dockets” in which homeowners get none of the process due them as Americans. To really understand how bad the Due Process issues are in Florida, consider this suit filed by the ACLU, and be sure to read the supporting documents. Some states have acted to protect the integrity of their courts and land records; some have not.
Many fraudulent documents relate to a property’s “chain of title”, the record of who owns, and who used to own, any given piece of the United States. In Massachusetts, the fraudulent document-fed foreclosure process–specifically the creation and use of out-of-time assignments of mortgage (as well as other document issues related to the standard securitization deal)–has left Massachusetts’s highest court facing the question of whether or not it should invalidate most of the completed foreclosures in that state. How’s that for a clouded title issue? Less dramatic title questions are being raised across the country, and as time goes on, still more are sure to develop.
Document fraud also includes magically appearing endorsements of notes. Every fraudulent allonge/note endorsement created at the time of litigation (see, e.g. Linda DeMartini’s testimony for Countrywide, pg. 6 at line 11) creates a presumption that such endorsements didn’t exist prior to the frauds’ creation. While it’s possible in any given case that the frauds instead reflect servicer unwillingness to get the originals from the document custodian, in many cases, the endorsements did not exist prior to their creation-for-litigation.
Two consequences can result from a failure to do timely endorsements (and also assignments of mortgage): one, a creditor may not have the right to foreclose, and two, a mortgage backed security may not be mortgage backed. Since manufacturing a note endorsement and assignment can create the appearance of standing when by rights there shouldn’t be, it seems clear obstruction of justice. Similarly, by creating the appearance that loans were successfully securitized when they weren’t, the created endorsement can conceal securities fraud. How is manufacturing evidence to create standing and conceal securities fraud not obstruction of justice?
So if ever there was a situation that called out for federal help “with innovative strategies in the administration of state and local justice systems” to “Uphold the civil and Constitutional rights of all Americans”, the foreclosure dockets in judicial states and the land records everywhere cry out for that help. But there’s no sign Justice is thinking about such things, much less doing anything. Indeed, none of the “Outcome Goals” for Strategic Objective III has anything to do with state or local justice systems in a direct way.
Justice has only defended one state legal system from foreclosure document fraud, and then on a small scale. Justice entered into a $2 million settlement with a now-defunct foreclosure mill that was a source of many fraudulent documents in New York courts, though it admitted no wrongdoing beyond inadvertent error. And AG Holder’s Justice doesn’t deserve full credit for even that, because the press release thanked “the U.S. Trustee’s Office for their invaluable assistance in this case.” There’s just no way that settlement happens without the Trustees’ professionalism and commitment to the public interest. Indeed, Justice has been pushing for a hush money settlement with the big mortgage servicers that is ostensibly about foreclosure fraud but would also eliminate several other types of liability faced by the big banks.
Despite Justice’s destructive “leadership” on this issue, some law enforcers are taking the document fraud seriously outside the U.S. trustee’s office. Nevada AG Catherine Cortez Masto has indicted people on hundreds of felony counts for their document fraud roles. Michigan AG Bill Schuette has issued criminal subpoenas to Lender Processing Services. To my knowledge, nobody has yet executed a search warrant at a document factory, seizing computers and whatnot, but it’s really the next logical step for anyone seriously interested in law enforcement.
A Federal Reserve Governor Understands
Although a serious crime spree on its own terms, document fraud, like the bygone NYC graffiti, matters also because of what it represents: government surrender to criminals run amok. Foreclosure document fraud is more ominous than graffiti in this regard, both because it’s a more damaging crime and because it reflects an escalation in the financial services industry’s perception that it is above the law.
Traditionally corporations that want to do something they’re not sure is legal will lobby to ensure it is. MERS, the mortgage servicing industry’s private, inaccurate database of land records, represented a major break with that tradition. Only one state adopted legislation blessing MERS, and the litigation mess around the country reflects the industry’s decision to simply push ahead without such legislation nationally.
Similarly, all of these fraudulent assignments of mortgage were created for servicers by companies certain in their legality without having any particular reason to be. (See the article I wrote for DailyFinance a year ago, in which an executive for Nationwide Title Clearing claimed these “long-standing industry practices [had] been found in court to be legal” but when pressed by me couldn’t cite a single case on point.)
Why was/is the industry so confident in their processes? I think it’s obvious: failing to enforce our laws gave the law breakers confidence that what they did was, in effect, legal, regardless of statute text. Federal Reserve Governor Sarah Bloom Raskin made this point in a recent speech:
“The rule of law includes enforcement itself.…fundamentally, a failure by regulators to enforce the laws and regulations as strong antidotes to financial misconduct and unsafe and unsound practices by the institutions they regulate establishes de facto acquiescence to the dominant norms of the financial marketplace. At that point, our laws become the resting place for unfair practices and broad disrespect for the law generally.”
The law enforcement failures most deeply tied to document fraud aren’t, however, the enforcement failures I detailed in Part 1. Mortgage and foreclosure document fraud didn’t grow out of a failure to incarcerate Angelo Mozillo or the top mortgage securitizers, or a failure to sue the banks for defrauding HUD, or a failure to sue them for deceptive mortgage modification practices.
The roots of mortgage and foreclosure document fraud were firmly planted in our bias against consumer debtors, and grew up through debt collectors’ pursuit of credit card and other borrowers less well regarded than homeowners. Amazingly, the document fraud and deceptive practices in our foreclosure courts are in some ways less egregious than the fraudulent practices long used against such borrowers in our small claims courts by debt collectors. Had law enforcement taken a strong stand against abusive creditors then, perhaps we would not have developed the massive foreclosure fraud industry we currently have.
To get a flavor for what non-housing debtors face, read this recent article from a Maryland paper and this one from October, 2010 from the NYT. For a more thorough analysis of the issues see this law review article by Professor Peter Holland of the University of Maryland. Also read JPM Chase Whistleblower Linda Almonte’s letter to the SEC about Chase’s handling of credit card accounts. Noteworthy allegations in her letter include:
-Chase’s files were filled with accounts that had incorrect and overstated balances
-Chase routinely destroyed information like bankruptcy filings, proofs of payment and other documentation, rather than accurately update their records
-Chase executives robosigned affidavits on a scale that would make Jeffrey Stephan blush.
Linda Almonte was fired for being a whistleblower, sued, and ultimately accepted a satisfactory settlement of her wrongful termination lawsuit.
If Justice had been on the document fraud beat years ago, defending Americans against these various abuses, so much harm could have been avoided.
So for its failure to go after document fraud now, its failure to go after creditor abuses back when, its failure to protect our Constitutional right to Due Process in non-bankruptcy courts nationwide, its refusal to defend our land records or view document fraud as the obstruction of justice–for all these, Justice flunks its strategic goal of the “fair and efficient administration of justice.”
The Interests of the United States
The final strategic objective is: ”2.7 Vigorously enforce and represent the interests of the United States in all matters over which the Department has jurisdiction.” To my mind, the “interests of the United States” are not the interests of President Obama, AG Holder, Secretary Geithner, or any other member of our government. The interests of the United States is the interests of our government as an embodiment of the American people.
In that frame, my discussions above and in Part 1 include these US interests:
-fealty to the rule of law by citizen, business and regulator/official alike;
-enforcement of the law, because as Governor Raskin put it, “If a law is worth having, it is worth enforcing”, and a failure to enforce legitimizes criminality; and
-equal enforcement of the law, because that is who we are as a nation.
And as discussed, Justice has failed on each point (with the exception of the US Trustees division.)
And that’s why I again call you, AG Eric Holder, and you, President Barack Obama, morally bankrupt.