Fla. AG probes law firms over foreclosures

MIAMI (Reuters) - Some employees of Florida law firms hired by banks to handle foreclosures have testified that they were "making up documents" and "forging stuff," the state's attorney general said on Wednesday.

Attorney General Bill McCollum said a nationwide probe would likely check out the relation between these firms and mortgage lenders.

McCollum, a Republican, is among the attorneys general from all 50 U.S. states who are jointly investigating allegations that banks failed to properly review foreclosure processes and may have submitted faulty documentation to evict delinquent borrowers.

Prominent lenders like Bank of America, JPMorgan Chase and Co. and GMAC Mortgage, among others, often turned to law firms to handle the bulk of their foreclosure cases in what has became a lucrative business for many.

"The really bad behavior appears to be in the law firms," McCollum told Reuters in an interview. "Did the banks encourage them to do that? I haven't seen any evidence of that so far."

The relationship between the firms and lenders will come under closer scrutiny as the attorneys general advance with their probe, McCollum said. Federal regulators are also looking into the foreclosure crisis and how mortgage lenders managed their procedures.

Florida, which has the third-highest foreclosure rate in the United States after Nevada and Arizona, is a base for some of the biggest law firms handling foreclosures and for foreclosure processing companies, some of them run by lawyers.

McCollum has opened an investigation into practices at four Florida law firms to determine if they fraudulently handled documents in foreclosure actions against homeowners.

In testimony, some employees, he said, described serious irregularities.

"We have affidavits from people who work there who said to us that they were actually making up documents, creating paperwork that was lost, forging stuff," McCollum said. "They were literally making it up."

"As far as the servicers like JP Morgan, GMAC and Bank of America are concerned, they hired these lawyers; they were not in-house," he added.

"But we certainly don't have all the answers."

IMPACT ON FLORIDA ECONOMY

On Wednesday, U.S. Housing and Urban Development Secretary Shaun Donovan said the government will follow up "vigilantly" to correct foreclosure paperwork irregularities.

The foreclosure documents fiasco, in which banks are accused of using "robo-signers" to sign hundreds of foreclosure documents a day, has reignited public anger at banks, which were blamed for helping to cause the recent financial crisis and U.S. recession. Since January 2007, nearly 3 million homes have been foreclosed.

Among the law offices being investigated by McCollum is one run by Florida lawyer David Stern. Finance giant Fannie Mae told mortgage servicers last week to stop sending cases to the law firm pending a review of its work, Fannie Mae spokeswoman Amy Bonitatibus said.

Jeffrey Tew, a lawyer who represents Stern, could not be immediately reached for comment.

Fannie Mae is also conducting audits of other Florida law firms it retained this year.

McCollum said he opposed calls for a nationwide moratorium on foreclosures after the controversy gained public attention.

He welcomed the decisions by Bank of America and GMAC, a unit of Ally Financial, to partially roll back their earlier decisions to halt foreclosures, saying a foreclosure freeze would hit Florida's already struggling economy.

Some housing analysts say foreclosed homes account for as much as 45 percent of sales this year in Florida.

"The worst thing for the economy in the state of Florida is for us to hold up foreclosures," McCollum said.

"For the sake of the state's economy, it's important for the companies involved, if they have their processes corrected, to go ahead and renew foreclosures as quickly as possible," he added.

"Then we'll worry about bad behavior in the past and worry whether there are penalties to be paid and if there are errors that haven't been found out about yet. Because it is going to take weeks, if not months, to do that."

(Editing by Pascal Fletcher and Leslie Adler)