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Saturday, December 01, 2007

Foreclosure Mills: It's Your Reputation, Stupid

by Tanta on 12/01/2007 11:30:00 AM

Another item sure to get some attention--or maybe not, since it kind of complicates the narrative of "predatory servicers." From the Wall Street Journal:

Law firms handling thousands of foreclosure cases on behalf of mortgage lenders and servicers are drawing criticism from judges, who say roughshod filing practices are trampling borrowers' rights.

Lawyers operating so-called foreclosure mills often are paid based on the volume of cases they complete. Banks and mortgage servicers often contract with such firms to handle foreclosures; the pay in Ohio, for example, is around $1,000 a case.

Um, is the pay based on volume, or is it just $1,000 a pop regardless of how many you do? My impression here is that it's the latter, and the problem is that this is a flat fee, not depending on how complex an individual suit is or--to the current point--how much time and effort might be needed just to assemble the documents and verify the liens in the land records to produce the original filing. It therefore becomes a matter of firms relying on volume because margins are skinny, and of treating every filing as a "no brainer" from the beginning. It's annoying when regular old newspapers don't get basic business practices. It's appalling when the WSJ doesn't.

Anyway, to continue:

The firms are typically small but may handle thousands of cases a year. Using computer software, they plug in variables such as a borrower's name, address and mortgage amount to generate a suit. Firms compete for business in part based on how quickly they can foreclose.

Um, no. They compete for business based on how quickly they can begin foreclosure proceedings. That's the problem here: a sloppy filing up front gets you onto the court's docket faster, but as we've seen, it tends to drag out the process and make foreclosures longer at the end of the day. And this description of the process ignores what's wrong with just "plugging in variables": we skipped the step of doing a search of the land records to verify that the last recorded assignment puts the foreclosing entity into current first-lien-holder status. And the step of going back to the servicer or trustee or whoever requested the foreclosure in the first place and reporting that an assignment needs to be recorded before the FC complaint can be filed.

"In general, most of the firms that practice this kind of law do a very good job," said Peter Mehler, a Cleveland-area lawyer who handles foreclosures on behalf of mortgage servicers. But in the "gold rush" to get a piece of the growing business, some firms "have cut corners."

Lately, judges are faulting law firms for what has become a common practice: filing a foreclosure suit, in states that require them, without showing proof that the plaintiff actually holds the mortgage and has the right to foreclose. (Such plaintiffs are often banks that act as trustees for investors of securities backed by mortgages.) The situation occurs in part because mortgage documents and the contracts between borrowers and lenders may change hands multiple times and may not be assigned to the plaintiffs at the time the suits are filed.

What this has really got to do with loans changing hands "multiple times" isn't very clear. If a loan changed hands exactly once, and no assignment was recorded in the land records exactly once, you'd have exactly the same problem. Of course the odds of having a missing assignment or a gap in the assignment chain go up when there are multiple assignments. But in that case, the problem is often not that the plaintiff--the last party in the chain--doesn't have an assignment. It's that the party who assigned to the plaintiff didn't have an assignment from the party who assigned to it, or something like that.

Why be so obsessed with the details here? Because way too many people have taken that unfortunate phrasing of the problem to mean that securities are purchasing delinquent loans just for the purpose of foreclosing. The WSJ, intentionally or not, falls into this kind of language:

This month, a state judge in Cincinnati dismissed a foreclosure lawsuit brought by Wells Fargo Bank because the bank filed the suit before it had acquired the mortgage. In dismissing the case, the judge sent a warning letter to the bank's law firm, John D. Clunk Co. LPA, in Hudson, Ohio. Judge Steven E. Martin wrote that it was "troubling" that the plaintiff "and its counsel filed the lawsuit with no basis whatsoever" and that firm must not do so again.

The law firm didn't respond to requests for comment. Wells Fargo declined to comment.

"Before it had aquired the mortgage" makes people think that Wells filed to foreclose a loan before it ever owned that loan, as if Wells saw, say, a bad loan at Podunk National and decided to buy it just for the pleasure of foreclosing it, but somehow managed to file first and buy later.

There is exactly zero reason to believe that this is what happened. Wells "acquired" the loan (or some security acquired the loan and Wells became the master servicer or trustee or something) back when the loan was fresh and new. What someone failed to do was to record the evidence of transfer of the beneficial interest in the collateral (known as an "assignment of mortgage") in the land records before the day the FC was filed.

It is quite common practice in the industry, as I have explained before, to execute assignments in "recordable form" when a loan is sold, and for the buyer or the buyer's custodian to take physical custody of that assignment, but to refrain from actually sending it to the county recorder of deeds for recordation in the land records unless and until it becomes necessary to foreclose. I know of no judicial opinion yet that has ever implied that the failure to record a document voids the loan sale; in fact, Judge Kathleen O'Malley's Order of November 14,* one of the several dismissals for inadequate documentation (along with Boyko's and Rose's) making the rounds, explicitly states that

The Court is only concerned with the date on which the documents were executed, not the dates on which they were recorded (if recorded) with the county recorder’s office.

The trouble with valid, executed, but unrecorded assignments is that even if a foreclosure attorney ran a records search before filing, in order to verify current lienholder, the assignment would not appear in the land records. It really is incumbent on the trustee or servicer to provide the original assignment for recordation, since the trustee or servicer is the one who has custody of it (or can get it from the custodian) and therefore the only one who can reliably vouch for its existence.

There are exellent reasons to record that old assignment first, then file your FC complaint. But as far as I can tell, judges aren't even asking for recorded assignments; they're just asking for valid assignments. What seems to have happened in at least one case--the Deutsche Bank case that Boyko went ballistic over--was that plaintiff's attorney, not having the real original assignments handy, simply executed new ones, after the fact. That's pretty amazing practice for an officer of the court, and His Honor reacted exactly the way one ought to. But it does not mean that the original assignments do not exist. Absence of evidence is not evidence of absence. Forging a new assignment because you can do that in twenty minutes, while just breaking down and requesting the originals from the custodian might take several days, is bad lawyering. It is not evidence that anyone is buying deliquent loans in order to foreclose them.

What reputable banks like Wells Fargo are learning here, I think, is a painful lesson in reputation risk. Wells hired some cheap corner-cutting law firm to handle its foreclosures (as did Deutsche Bank), and as a result, its name is now all over the press in association with practices that can be made to sound exceptionally sinister. Remember Boyko's "priceless" comment? Well, I'm here to suggest that Wells Fargo's good name is worth a whole lot more to it than $1,000. Legally, plaintiff is responsible for the actions of plaintiff's counsel.

Here, by the way, is the relevant part of Judge Thomas Rose's order** involving a number of foreclosure filings by several different trustees:

To date, twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction pending before this Court were filed by the same attorney. One of the twenty-six (26) foreclosure actions was filed in compliance with General Order 07-03. The remainder were not.2 Also, many of these foreclosure complaints are notated on the docket to indicate that they are not in compliance. Finally, the attorney who has filed the twenty-six (26) foreclosure complaints has informed the Court on the record that he knows and can comply with the filing requirements found in General Order 07-03.

Therefore, since the attorney who has filed twenty-six (26) of the twenty-seven (27) foreclosure actions based upon diversity jurisdiction that are currently before this Court is well aware of the requirements of General Order 07-03 and can comply with the General Order’s filing requirements, failure in the future by this attorney to comply with the filing requirements of General Order 07-03 may only be considered to be willful. Also, due to the extensive discussions and argument that has taken place, failure to comply with the requirements of the General Order beyond the filing requirements by this attorney may also be considered to be willful.

A willful failure to comply with General Order 07-03 in the future by the attorney who filed the twenty-six foreclosure actions now pending may result in immediate dismissal of the foreclosure action. Further, the attorney who filed the twenty-seventh foreclosure action is hereby put on notice that failure to comply with General Order 07-03 in the future may result in immediate dismissal of the foreclosure action.

My boldface, there: it seems clear to me that this is an admission that the assignments really do exist, and can, in fact, really be produced. But what, we ask, has relying on this attorney done for the reputation of the lienholders? The story wasn't reported as "some worthless lawyer screwed up"; it was reported as Deutsche Bank and Wells Fargo and HSBC et al. screwed up. If you don't want your name in the headlines like that, hire a better lawyer. And pay for it. Oh, wait . . .

Allow me to close by observing that Curly and Larry (if not Moe) have lent some weight to a proposal that would basically mean servicers shoving through across-the-board modifications to "freeze" interest rates. I'm not here to argue the wisdom of rate freezes in this post. I am here to point out that a modification of mortgage is a legal document that has to be recorded in the land records in which the original mortgage was filed. If the modification is being executed by a servicer or trustee on behalf of the noteholder, then any intervening assignments up to the one to the modifying party need to be recorded first, so that the recordation of the modification is valid. Also, modification agreements are complicated documents; you want to be very careful with their wording, so that you are sure you are modifying only certain specified terms of the original mortgage and note. More than a few sloppy servicers have been haunted by a bad modification agreement that inadvertently waived rights or terms that servicer needed to keep.

So it really just sounds like a fantastic idea to push through a major effort to execute modifications really fast and cheaply, doesn't it? Frankly, the whole idea gives me goosebumps.


*UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN DIVISION, In Re Foreclosure Actions 1:07cv1007 et al., November 14, 2007. No, I didn't go to law school and learn how to cite court orders in proper format. So sue me if you can find a decent lawyer.