Oct. 20, 2010 -- Despite doing business with a controversial Florida law firm accused of using "robo-signers" to rubber-stamp thousands of mortgage documents, Citigroup claims it never employed such practices in the rush to foreclose on homes.
"We have not found evidence of robo-signing," John Gerspach, Citi's finance chief, told reporters this week. "We are fairly confident we have not relied on robo-signers."
But former Labor Secretary Robert Reich, a professor of public policy at UC Berkeley, doubted that Citigroup and other banks did not take shortcuts when confronted with the rising foreclosure tide.
"Citi was competing with every other mortgage lender," Reich said. "Money was cheap. Lenders were lending it out to almost anybody who could stand up straight and doing it in an extraordinarily rapid and careless way. I would be very surprised if Citi's practices were substantially different from everyone else's."
On a call with reporters, CFO Gerspach said: "Regarding foreclosures, as we have been saying publicly, we continuously view our document handling procedures and we believe the integrity of Citi's foreclosure process is sound. While we use external attorneys to prepare documents, each package is reviewed by a Citi employee who verifies the information and signs the foreclosure affidavit in the presence of a notary. When errors are found, the documents are returned to the attorney who revises the package and resubmits the documents for review."
"We have intensified our ongoing process reviews and ... have not identified any systemic issues," he added.
Investors sold off bank stocks this week on worries that lenders may be forced to buy back large parcels of mortgages that were peddled to investors based on faulty or missing documents or misrepresentations.
Bloomberg News reported Wednesday that Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit.
If successful such a move could force other lenders to follow suit. Citibank's exposure to bad mortgages could be in the $22 billion to $35 billion range if the bank were to be forced to repurchase the securities, according to analyst estimates.
Most of the possible losses would be separate from the document scandal, instead relating to alleged misrepresentations made when the loans were packaged and sold to investors.
Citigroup, which is one-fourth owned by the U.S. government, suffered huge losses during the global financial crisis of 2008 and received a $45 billion bailout, of which it still owes about $12 billion.
It's unclear what, if anything, the document problems will end up costing the banks. But a former paralegal with David J. Stern's firm, Florida's largest foreclosure law practice, has told state investigators that the firm routinely signed court paperwork without reading it, misdated records, forged signatures and passed around notary stamps in the rush to foreclose on homes.
"This is just the beginning really," the paralegal, Tammie Lou Kapusta, told ABCNews.com. "It's the tip of an extreme iceberg."
Jeffrey Tew, a lawyer representing multimillionaire attorney Stern, whose Plantation, Fla., firm is under investigation by state Attorney General Bill McCollum for allegedly filing improper court documents, said Citigroup and other banks gave the firm "limited power of attorney" for more than a year until May 2009. He admitted mistakes in some foreclosures but denied a systemic problem, including "robo-signings."
"There hasn't been one piece of evidence that David Stern has done anything wrong," Tew said.
In another deposition, released by McCollum's office this week, a former Stern employee said a manager signed up to 1,000 documents a day without reading them. According to the deposition, some workers were lavished with gifts -- including cars, homes and jewelry -- for speeding up the foreclosure paperwork.
Mark Rodgers, a Citigroup spokesman, said that "pending the outcome of the AG's investigation, Citi is not referring new matters" to Stern's law firm. He declined further comment because of the investigation.
"We believe the integrity of Citi's foreclosure process is sound," Gerspach said during a conference call with analysts, investors and journalists.
Tew said his client's law firm last week laid off about 400 of its 1,300 workers because foreclosures had virtually stopped throughout the nation.
GMAC also stopped referrals to the Stern law firm, and Fannie Mae and Freddie Mac have reportedly dropped him as well.
Tew dismissed the investigations into the mortgage mess as politically motivated and denied that Stern's firm engaged in mass signings of court papers or any other irregularities.
"There hasn't really been any proof of that yet," Tew said. "We have one or two statements from former employees but there's been no proof in court. Let's be realistic, the problem was caused by this once in a century collapse of the economy and the housing market, which created this unprecedented volume of foreclosures and they were being fed into an 18th century legal system."
Reich said the sheer volume of foreclosure cases and the pressure to cut costs appeared to make legal shortcuts a standard practice in the mortgage industry.
"It's all about the bottom line and if a bank can do it faster and cheaper than its rival this way, then presumably the industry norm becomes the use of these sorts of 'robo-signoffs,'" he said.
Allegations of legal shortcuts are the latest leveled against Stern, who has amassed a fortune foreclosing on the homes of struggling families on behalf of lenders.
"From David Stern's perspective, he's a lawyer given defaulted mortgages to foreclose in a court proceeding," said Tew. "So it's really wrong to vilify him. Let's put it this way, there is a well-organized defense bar who is making a lot of money keeping people in their homes."
But it's the booming mortgage-servicing industry that is under legal scrutiny. The attorney generals of all 50 states last week launched a joint investigation into the industry in hopes of pressuring financial institutions to rewrite a sea of troubled loans.
Across the nation, mortgage-servicers, which include units of major banks such as Bank of America Corp., have been accused of submitting fraudulent documents in thousands of foreclosure proceedings.
In Florida, Stern is foreclosure king, operating the large law firm plus a foreclosure processing company and other support businesses that he recently sold off.
His firm, which filed 70,382 foreclosure cases last year, is the largest of four under investigation by McCollum for allegedly filing improper documents with courts to hasten the overloaded foreclosure process.
Foreclosure Industry Poster Boy
To detractors, the 50-year-old Stern has become emblematic of the foreclosure crisis, the architect of what they call a giant assembly line that has undermined struggling homeowners at a time of record foreclosures. Nationwide, there were 2.8 million foreclosures in 2009. Florida leads the nation in foreclosures with more than 400,000 filings this year alone.
"He is notorious in Florida and, in the rest of the country, we pay some attention to Florida because the worst behavior often emanates from there," said Linda Fisher, a professor and mortgage-fraud expert at Seton Hall University's law school. She said she had no direct knowledge of the Stern's practices. "I've heard some pretty bad stories about Stern for at least the last couple of years or so."
To defenders, Stern is a hard worker who has legally reaped enormous profits representing banks and financial services in actions against tens of thousands of delinquent borrowers.
"It's really unfair to make the foreclosure lawyer ... somehow a villain," Tew said. "With the increase in volume, there's no question that David firm's revenues have grown dramatically but there's nothing wrong with that. He's not gouging."
Tew said Stern's firm makes about $1,400 per foreclosure, totaling about $98 million last year.
Still, the rising foreclosure tide also meant shortcuts and sloppy legal work, according to Kapusta's sworn statement to the state attorney general.
The paralegal, who worked for Stern a little more than a year, described an office where signatures on notarized documents were regularly forged, legal papers were outsourced to Guam and the Philippines, and shouting matches erupted when cases stalled.
The accusations, in a sworn statement taken late last month by the Florida attorney general, coincide with mounting nationwide criticism of the practices used to take homes from families.
Kapusta, who claims she was fired by the firm in July 2009 after refusing to falsify documents, said Stern's business jumped from about 200 employees to 1,100 in one year as foreclosures skyrocketed and staff struggled to keep up.
Notary stamps were always available, and employees such as Kapusta, who were not notaries, routinely used them on official documents, she said. Those who could best fake the signature of the person who verified foreclosure affidavits were allegedly sought out to forge her name.
"If you focus on the way these businesses operate, it's, at best, sloppy and, at worst, fraudulent," Fisher said of the firms that have become known as foreclosure mills. "The whole system was broken down."
Tew dismissed Kapusta's allegations as simply untrue, the rants of a disgruntled former employee. "You can see she has a real vindictiveness against the firm," he said.
Stern's lawyer denied any wrongdoing in the foreclosure process.
"There is no question that there is a necessity to make these foreclosures correct and appropriate," Tew said. "We do not admit that there was any intentional cutting of corners. There may have been some human error on a very small percentage but there was no intentional cutting of corners."
In the past month, GMAC, JPMorgan Chase and Bank of America have halted or slowed foreclosure procedures, after bank employees and affiliates admitted to signing thousands of documents without knowing the details of the cases. BofA said yesterday that it will restart the foreclosures after its own probe found no irregularities.
"The problems with these firms – and they're very sloppy practices – is that they unacceptably cut legal corners and put the burden on borrowers to basically pay whatever these folks have them pay," said Jeffrey Golant, an attorney in Pompano Beach. "They're loading down with junk fees and illegitimate charges, basically putting people who are already struggling, maybe possibly in most cases legitimately behind on their mortgages, but loading up with such abusive fees that people will never get out of foreclosure."
Yachts, Real Estate, Private Island
Still, the crisis has been good for Stern and the rest of the mortgage-servicing industry. Stern and his wife Jeanine have brought nearly $60 million in real estate in recent years, mostly in Florida, according to property records.
His 16,000-square-foot mansion, valued at more than $15 million, occupies a corner lot in a private island community on the Atlantic Intracoastal Waterway in Fort Lauderdale, according to the New York Times and Mother Jones magazine.
The mansion is featured on a water-taxi tour of the area's grandest estates, including the homes of Jay Leno and billionaire Blockbuster founder Wayne Huizenga, and the former residence of Desi Arnaz and Lucille Ball. In addition to the 130-foot yacht, Stern reportedly has an automobile collection that includes a 2008 Bugatti and multiple Ferraris, Porsches and Mercedes.
But Tew declined to discuss his client's assets.
"All that does is feed into this scenario that somehow they're taking advantage of poor people who are losing their houses and getting rich off of it," he said. "You could say the same thing about a neurosurgeon that makes millions of dollars a year from people who sustained terrible head injuries."