REQUIRED READING: On Feb. 10, Fannie Mae announced to servicers that it was terminating its relationship with Fort Lauderdale, Fla.-based Ben-Ezra & Katz PA. Fannie Mae, which had bolstered its network of approved attorneys in the state months earlier, gave servicers five days to determine where they would send their loans.
‘The new law firm(s) should be instructed to work with Fannie Mae and the Ben-Ezra firm to execute an orderly transfer of the collateral files and any additional information needed to conduct the matters being transferred,’ Fannie Mae told servicers. In a separate statement provided to SM, Fannie Mae said its decision to stop using Ben-Ezra & Katz related to "certain document execution issues" at the firm.
"It is our expectation that law firms will handle matters in strict compliance with proper procedures, ethical codes of conduct and legal requirements," Fannie Mae said in the statement. "In instances where we have reason to suspect that a firm may not be doing so, we will immediately engage and take appropriate action."
One day after cutting Ben-Ezra & Katz loose, Fannie Mae filed a legal complaint demanding the firm hand over case files, promissory notes and mortgages. "To date, Ben-Ezra has refused to deliver the case files, which Fannie Mae stands ready, willing and able to accept," the Feb. 11 complaint said. The transfer of files pertaining to 15,000 loans began Feb. 11, the law firm states, and was completed in mid-March.
The situation between Fannie Mae and Ben-Ezra & Katz caught many onlookers off guard. Whereas Fannie Mae's dismissal last year of the Law Offices of David J. Stern was all but certain after a slew of alleged abuses became public, the termination of Marc A. Ben-Ezra, a Martindale-Hubbell AV-rated attorney, came as a surprise to some. It also speaks to the more hands-on management style taken by Fannie Mae on its retained legal counsel.
"It's a warning shot to every firm in the network," says Scott Goldstein, president of NDeX, which provides default processing services to law firms. "The attorneys need to show they are the right attorney for Fannie Mae or the servicer, and if they're not, they're going to make a decision to change their network. Once you're in the network, you need to make sure you maintain your service level."
Freddie Mac's network of designated counsel and trustees has also undergone changes in recent months. Besides David Stern, Freddie Mac has ended relationships with firms in two states: the Law Offices of Marshall Watson PC in Florida and Shapiro & Burson LLP in Maryland. Both splits were mutual, according to Freddie Mac spokesperson Brad German. At last check, Shapiro & Burson was still on the designated list in the state of Virginia, though its status was listed as "suspended" on Freddie Mac's website. John Burson, the law firm's managing partner, confirmed to SM in early April that referrals to Shapiro & Burson in Virginia had been suspended until Freddie Mac completes its audit of the firm. Burson said he expected the audit to be finished shortly.
Though parties on both sides have been fairly quiet about the circumstances surrounding their splits, the law firms in question have been at the center of investigations relating to foreclosure documents. Marshall Watson recently agreed to pay the office of Florida's attorney general $2 million to settle allegations that the firm improperly prosecuted foreclosure cases.
In a statement, Marshall C. Watson, the firm's president and CEO, said the firm was pleased the investigation had been resolved without any findings. The firm was also the first to settle with the attorney general's office, whose investigations into other default law firms are ongoing. Shapiro & Burson, meanwhile, is reportedly under investigation by the state attorney for Prince George's County, Md.
Transfer trauma
Unique to the Fannie Mae-Ben-Ezra & Katz matter is that the firm purportedly discovered the procedural errors in question and alerted Fannie Mae to the problems.
"Unfortunately, our openness led to our being removed from Fannie Mae's retained counsel list, we think before and without Fannie Mae's fully understanding and appreciating the ethical and honest approach we followed in responding to the issues we identified and were correcting," the firm said in a statement provided to SM.
Ben-Ezra & Katz maintains that the deficiencies were technical in nature and that foreclosure cases were not affected as a result. The firm – whose practice one Miami-Dade County judge described as "grossly negligent," according to a recent Palm Beach Post report – also said it was in the process of correcting the problems when Fannie Mae decided to end the relationship.
Fannie Mae declined to comment on whether other firms have self-reported similar problems. One source at the company suggested Ben-Ezra & Katz had not remedied the mistakes to Fannie Mae's liking.
The transfer of Fannie Mae files took time, Ben-Ezra & Katz contends, because the process must be orderly. The firm also recently found itself in hot water with mega-servicer JPMorgan Chase. Court documents show that Chase terminated Ben-Ezra & Katz as a legal provider March 9. The bank requested the firm's cooperation in transferring files to new attorneys.
Two weeks later, Chase, offering a $2.8 million security bond for legal work tendered, claimed Ben-Ezra & Katz breached its contract. Chase sought a temporary restraining order requiring Ben-Ezra & Katz to hand over the files, which the bank claimed Ben-Ezra & Katz was holding hostage. The firm, in turn, alleged it was owed outstanding fees and costs totaling more than $6 million. The court ultimately denied Chase's request for a preliminary injunction and ruled that Chase had to post a $4 million security bond. Upon posting of the bond, the files would transfer immediately to Chase, according to court documents.
Chase did not respond to SM's requests for comment. Ben-Ezra & Katz said the court's order would enable the firm to complete its "long-standing pledge to transfer the files in an orderly, professional manner." The firm also stated that, in the case of recent transfers, "successor firms have sometimes been slow to substitute into cases."
"That leaves our attorneys in a difficult situation; they still have a professional responsibility for a case that is no longer at our firm and for which they can take no action," Ben-Ezra & Katz told SM.
To gain an appreciation of what is happening in Florida, one has to look no further than the fallout from David Stern. Fannie Mae, which had a team on-site to assist in the transfer of loans, completed its transfer swiftly, according to spokesperson Amy Bonitatibus. However, by the time the Stern firm closed its doors at the end of March, there were still thousands of foreclosure files without representation, reports suggest.
Earlier that month, Stern told judges in the state he was withdrawing from an estimated 20,000 cases. As of press time, the fate of those files was unclear, although the state judiciary's attitude toward Stern's handling of the situation was anything but. His attempt to withdraw "does not comply with the Florida Rules of Civil Procedure and is thus unacceptable," the general counsel for the Miami-Dade courts wrote to Stern, according to The Palm Beach Post.
Though Stern's situation is not comparable with Ben-Ezra & Katz's, it does orient one with Florida's currently hectic legal scene.
Of the loans that have been transferred from Stern to other attorneys, many have been put on hold, legal providers say. Many others have undergone additional reviews by the new legal teams working the files. NDeX's Goldstein says the firms that absorb the files need to determine the last valid step in the foreclosure process, unwind the file back to that step and move forward from there.
‘In the end, the servicer and the investor want valid foreclosures," Goldstein says. He declined to comment on how many former Stern files have been restarted at Albertelli Law, NDeX's attorney firm in Florida. Not all files have to be restarted, he adds.
"To say all these files need to be restarted is one, not cost-effective, and two, is going to waste time in this process if it's already been decided these loans should proceed to foreclosure," he says. "For the new attorney, it's a daunting task to open up all these files and review them to find out what's the most prudent way to go forward."
Alberta Hultman, executive director and CEO of attorney network USFN, similarly explains that law firms have to make long-term investments when deciding to take on new business in the form of thousands of pending foreclosure cases.
"There's a huge investment that's going to be made," she says. "People, real estate and technology are not short-term investments."
When Fannie Mae revisits its retained attorney list, as it did with its recent expansion into 14 new jurisdictions, the company decides which firms to use, in part, based on servicers' recommendations. The government-sponsored enterprises have been burned by the mentality of some attorney firms that admission into their attorney networks equates to lifelong membership, Goldstein says. Judging by the recent activity, Hultman adds, that mentality is likely to change.
"The system has worked a certain way for so long; it's hard to imagine not becoming at least somewhat complacent, not out of arrogance, but just because that's how it worked and that's how everyone expected it to work," she says. "But apparently, because there were some glitches in the system that went unnoticed – and then when they got noticed, they were huge – the system isn't going to work that way anymore."
