Why Florida's Foreclosure Machine Is Slowing Down

At the George E. Edgecomb Courthouse in Tampa, Judge Sandra Taylor presides over one of the special courts set up to help work through Florida's backlog of foreclosure cases. Sitting at a desk in a fifth-floor conference room, with a court assistant and a cart stacked with manila envelopes at her side, Taylor uses a speakerphone to talk to attorneys for the banks and mortgage servicers who call in rather than appear in person. Most borrowers don't show up to contest the loss of their homes.

One day in early October, Taylor had 51 cases on her docket. It took her about 30 seconds to approve some of the actions and set a sale date after lenders' attorneys summarized the case and the amount owed. "I wish there was more we can do," Taylor told one homeowner who did appear. She said there was "no legal reason" why she shouldn't approve the foreclosure on the home.

Another homeowner, Ingrid Young, 44, told Taylor she couldn't afford the $1,900 monthly payment for her Tampa house because she earns only $1,800 a month. "I am in default, and I do realize that," she said. Taylor approved the foreclosure after persuading attorneys for CitiMortgage, a unit of Citigroup (C), to set the sale date in January, after the holidays. "It's a very sad business," the judge said during a break.

Florida has the third-highest foreclosure rate in the U.S. after Nevada and Arizona, according to RealtyTrac, the Irvine (Calif.)-based data firm. One in every 34 housing units—double the U.S. average—was in the foreclosure process or bank-owned as of Sept. 1. Florida's legislature appropriated $9.6 million this year to hire semi-retired judges and case managers to preside over foreclosure hearings such as those in Tampa, which have come to be known as "rocket dockets."

Growing Backlog

The goal is to clear 62 percent of the backlog by next July, according to Craig Waters, a spokesman for the Florida Supreme Court. J. Thomas McGrady, chief judge of Florida's Sixth Judicial Circuit, once thought that was achievable. Now that JPMorgan Chase (JPM), Ally Financial, and other banks have put the brakes on foreclosures or evictions to look for any paperwork irregularities, McGrady is "very doubtful" his courts can do that. The Sixth Circuit, which covers the area around Clearwater and St. Petersburg, faces a backlog of 33,000 foreclosures, he says.

"All of a sudden all of these issues pop up with the lenders," McGrady says. "It's going to slow down the whole process. We're still getting 1,000 cases a month." At the Clearwater court, lenders as of Oct. 12 had canceled more than half of 84 hearings to approve foreclosures that were scheduled for the following day, according to Ron Stuart, a court spokesman. Half of 110 hearings set to take place the day after that had been canceled as well.

Among the alleged defects the banks are examining are lender affidavits signed by people, often described as "robo signers," who repeatedly failed to verify the accuracy of the information in the documents. A lawsuit filed last week by Ohio's attorney general accuses Ally and its GMAC Mortgage unit of committing fraud by submitting hundreds of false affidavits in foreclosure cases. Ally said in a statement that it "believes there was nothing fraudulent or deceitful about its foreclosure practices."

A coalition of all 50 state attorneys general, led by Iowa's Tom Miller, announced a joint investigation into foreclosures on Oct. 13. Florida Attorney General Bill McCollum has asked five lenders and mortgage servicers to meet with him to discuss ways to "redeem the integrity" of the foreclosure process. "Every homeowner that's in foreclosure now should be questioning" the documents, says Matthew Weidner, an attorney in St. Petersburg who defends homeowners in foreclosure cases. "This entire system is now a great big question mark." Oliver Chang, a housing strategist at Morgan Stanley (MS), says that as many as 9 million U.S. mortgages in the foreclosure pipeline or already through the process may face legal challenges.

Law Firms Investigated

The lenders aren't the only ones coming under increased scrutiny. McCollum is investigating four law firms, including Shapiro & Fishman and the Law Offices of David Stern, that handle foreclosure cases on behalf of lenders. Among the banks represented by the firms the attorney general has targeted are CitiMortgage, Bank of America (BAC), and Deutsche Bank (DB). McCollum accuses the firms of "unfair and deceptive actions" and says thousands of foreclosures that had been approved by judges may have been the result of their allegedly improper actions. Gerald Richman, an attorney for Shapiro & Fishman, says the firm is ready to cooperate with the attorney general's office if it narrows the scope of a subpoena seeking information, which Richman calls "invasive." Representatives of the other firms didn't return phone calls seeking comment. Citigroup says it has stopped steering foreclosure work to the Law Offices of David J. Stern.

Meanwhile, the foreclosure process grinds on. Weidner criticizes judges for continuing to hold rocket docket sessions amid the controversy over flawed documents. "Inside these courtrooms, judges—the bad ones—are just granting summary judgments like nothing's happening, like it's business as usual," he says. "They're abdicating their responsibilities to be real judges."

Several Florida judges say their job is not to advocate for homeowners or investigate the accuracy of documents—courts depend on homeowners or their attorneys to raise objections. "We're processing thousands of cases where no one is really contesting them," says W. Douglas Baird, a judge in Clearwater. "It's not a situation where the courts have the ability to go through every document that's filed and challenge and question those documents."

McGrady, the chief judge in Florida's Sixth Circuit, says his courts have seen "numerous situations of some very sloppy practice" by lenders. "I'm disappointed that perhaps they've taken advantage of a system that was set up to allow them to obtain their foreclosures in a reasonably fair and expeditious process," he says, "and they may have abused that."

The bottom line: As more questions arise about the legitimacy of foreclosure proceedings, Florida is having a hard time clearing its case backlog.

    Before it's here, it's on the Bloomberg Terminal.