Did lawyers create foreclosure document mess?
The Internet is humming over a Wall Street Journal article implying they did.
This post comes from Marilyn Lewis of MSN Money.
You may have asked yourself: How real is the big foreclosure document flap? That very question is getting a passionate airing online in response to a Wall Street Journal article, "Niche lawyers spawned housing fracas."
The article gives quite a bit of weight to banks' contentions that at the heart of the problem is a lot of noise over technicalities.
Journal readers, bloggers and a legion of others around the Internet are jumping on the debate about whether the scandal is really a tempest in a teapot or evidence of banks playing fast and loose with the legal system.
The Journal story traces the origins of the defective-document uproar to a brainstorm by Jacksonville, Fla., attorney James Kowalski. Kowalski clients Lillian and Robert Jackson faced foreclosure eviction six years ago but held it off because of Kowalski's "gambit," the story says.
But their lawyer, James Kowalski, had the idea of taking a deposition from the signer of the mortgage papers. When a document processor for GMAC Mortgage admitted she routinely signed such papers without being familiar with details of the loans, she was tagged as one of a species now known as robo-signers.
It was a first step in the growth of a legal sub-specialty called foreclosure defense that has sown confusion and turmoil in the housing market. Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing. In the 23 states where foreclosures entail a court hearing, the bank may be ordered to pay the homeowner's legal bill if a lawyer can convince a judge that the bank has submitted false documents, such as affidavits saying employees personally reviewed the details of loans when they didn't.
The article implies that these are ambulance-chasing tactics by legal beagles exploiting the justice system. The danger is that many other ambitious lawyers will pile on the foreclosure-defense bandwagon: "The big risk to banks and the housing market, indeed, is that more homeowners and lawyers come to see such cases as attractive to fight," the story says.
The Journal quotes Andrew L. Sandler, "a Washington securities lawyer who represents banks and firms that service mortgages." He said:
The class-action lawyers are swarming around this issue right now, because they perceive that it can result in significant fees for them. But they're not well-founded cases, and the banks will vigorously contest any class action around these issues.
Let the screaming begin
Hundreds of Journal readers have posted on the article's comments pages and a number who are lawyers -- or at least sound like lawyers -- are debating the legal points of the activist attorneys' tactics.
Typical of the outrage the Journal's article provoked is this, from "Sten Deadio":
Forgive me if I don't fall to the ground wracked with sadness for the poor unfortunate banks. The banks that have worked relentlessly to make unethical behavior legal. The banks that sold high risk stuff as low risk, flooded the market with houses they suckered people into buying and then foreclosed on, set the economy on fire, beat it with sledgehammers, dropped pianos on it and then pushed it off the cliff and sent in an insurance claim demanding immediate recompense.
Lawyers didn't spawn this problem. The crooks who generated subprime mortgages, bundled mortgages, and leveraged them 3, 4, 5 times spawned this problem. Then when Bush, Obama, and Congress had to deal with the mess they had created they decided that sorting out who owned what was too complicated, and went forth to save the crooks who created the mess, while doing NOTHING to help homeowners. They then turned the same crooks loose to throw everyone out of their homes while not figuring out who owned what and while making more money and keeping huge bonuses. These attorneys are cleaning up after that whole privileged elitist mess and trying to restore proper accounting and recordkeeping, individual property rights, and fairness to average citizens. Yes, this may "upset the system" and slow the process of "flushing" out a lot of housing, and even cost mortgage paying homeowners like myself more equity. But for the first time since all this began, a little fairness is creeping into the system.
Equally miffed are legions of readers who see the bank documents problem as one of exploiting technicalities. Writes "Larry Godwin":
The courts need to cut this nonsense off with a simple question; "did you agree to pay this amount?" The answer is simply, yes. "Are you paying the amount you agreed to?" The answer is, no.
Claiming the bank doesn't own your loan while continuing to pay the bank on that loan is a tactic that's bound to bite homeowners, according to "Gregg Larson":
Ask the debtor to explain why they made payments to a particular lender that they now seek to disown. "Yes sir, I did pay Bank of America $3500 per month for 24 months, but they don't really own the note." Ever hear of estoppel? It's ... legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, … by his own deed, acts, or representations, either express or implied." Just how are these debtors going to explain that they took the money in the refi, spent it, made payments and now want to keep the house without making payments?
The blowback is reverberating around the Net.
New York Observer columnist Mike Taylor writes in "What the hell is wrong with The Wall Street Journal?":
… it's hard even to imagine even the most pro-bank reader taking comfort in "Niche lawyers spawned housing fracas." The article essentially questions the value in exposing illegal activity and subjecting it to judicial scrutiny. Who's going to take that bait?
Apart from Journal readers, it was hard to find anyone defending the article. Writes NakedCapitalism, in a post titled "Wall Street Journal runs inaccurate piece on antiforeclosure lawyers":
Funny that anyone can think this spin is remotely true. The fact that solo practitioner lawyers could have such an impact on the system is not proof that they are miscreants, as the Journal implies. It is that the foundation of mortgage securitizations is rotten as a result of widespread abuses, first on the origination end, later in the foreclosure process. These small firm players are using the legal equivalent of toothpicks; the fact that their efforts have destabilized the foundation of the residential mortgage backed securities market is tangible proof that they were imperiled to begin with.
At Forbes.com, Halah Touryalai's Working Capital blog weighs in with "Dear Wall Street Journal, foreclosure lawyers are not the problem":
Wouldn't the first step in this whole mess involve the banks who employed these unknowing loan processors? Regardless, I think most people would agree that these foreclosure defense lawyers did not induce the turmoil in the housing market.
Sure, defense lawyers aren't the most righteous professionals in the world. But in this case, at least, they are going after an industry that isn't so virtuous either.
But do not feel you must have an opinion. Maybe you're a bloodless capitalist who simply wants to cash in. If so, read The Street's Mercenary Trader blog ("a community of ruthless profiteers"), which suggests stock plays to work all sides of the question: "Global Macro Notes: Cashing in on ForeclosureGate."
More from MSN Money:
The lawyers did not create the situation where the banks have left their flank wide open and vulnerable. The banks and a different group of lawyers did. And to that end, the lawyer were told by the banks that the "details" didn't matter, just get them to sign. Now that it is under scrutiny they are crying "foul". They are simply reaping what they sewed.
In the end the bank, the lawyers and yes the average homeowner will benefit from true transparency and honesty in lending.
If we had it now this whole housing mess would quickly clear up and the banks could resume lending. But they don't recognize that clearing up their current mess will in the end bring profitability to them, the lawyers and the homeowners in the end.
As a person who owns 2 homes with mortgages I hope they clean up there act soon. The American economy is waiting to resume, but the banks are still lost in their last debacle.
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