Comment: The charade that is “mortgage servicing” has been exposed as a corrupt, fraudulent debt collection practice preying on homeowners by forcing them into foreclosure at all costs. The banks got away with this because they could get law firms to flat-rate each foreclosure, and 98 out of 100 would go through uncontested. GREAT DEAL!! But then an asshole like me comes along who fights tooth and nail to expose the racketeering and wire fraud that IS forged notes, multiple versions of the notes, multiple or trailing assignments of mortgage, or the overall failure of the foreclosure mill to complete due diligence, verify the claim, and NOT AGREE TO PRODUCE FORGED EVIDENCE OF PROOFS OF CLAIM. We’re now preparing for the second foreclosure if the Section 363 sale fails. Can’t freaking wait!!!
Nearly eight years after the subprime mortgage crisis violently shook the U.S. economy, law firms representing lenders and servicers in foreclosure actions are continuing to feel aftershocks that are sometimes fatal.
New Jersey firm Zucker, Goldberg & Ackerman is planning to close its doors in late August after 92 years in business. Despite a healthy volume of business, the firm is more than $20 million in debt. The underlying reason, its bankruptcy counsel has said, is that mortgage-servicer clients were refusing to pay.
Georgia firm Morris Schneider Wittstadt filed for bankruptcy earlier this month after discovering a multimillion-dollar shortfall in its escrow accounts.
Butler & Hosch, a Florida-based firm with 11 offices and 200 attorneys, abruptly closed its doors in May. CEO Bob Hosch said the firm suffered from a drop in foreclosure filings.
“The explosion of 2008 created a new universe,” said Annette M. Rizzo, a retired Philadelphia Court of Common Pleas judge who spearheaded the Philadelphia Residential Mortgage Foreclosure Diversion Program. “What was a sleepy docket had become a burgeoning docket.”
The high volume of foreclosures was followed by regulatory responses at the federal and state level, and the effects trickled down to the law firms that work with mortgage servicers.
“To do this practice properly under high radar … I just think that some of these firms that can’t adjust or don’t have the right staffing models can’t survive,” Rizzo said.
Regulations Trickle Down
The Consumer Financial Protection Bureau, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, has the authority to enforce requirements embedded in Dodd-Frank, as well as create new regulations.
New requirements of the lenders and servicers have created a pressure to rethink the business model, Rizzo said.
“They must perform due diligence and answer to a whole new regulatory scheme,” she said. “That funneled down to firms that have been the mainstay.”
Observers in foreclosure law said the new requirements created more work for law firms, since everyone is operating under more scrutiny. But most foreclosure firms operate on a flat-fee basis, they said, and sometimes they have to fight to get paid.
Thin profit margins, they said, have become thinner, and firms may need to adjust their business models to survive.
According to a 2012 announcement from Fannie Mae outlining new requirements for default-related legal services, servicers working with their loans are required to review and approve all attorney fees, then seek reimbursement from Fannie Mae.
The announcement mentioned a maximum allowable foreclosure fee, which is intended to cover counsel’s attendance at the foreclosure sale as well as any motions for default or summary judgment. It also said attorney fees “cannot be considered to be earned until all of the steps necessary to complete the foreclosure and vest title in Fannie Mae, including any post-sale confirmation or ratification proceedings, have been completed.”
Kevin McCarthy, founding partner in the San Diego office of McCarthy & Holthus, said that although his firm “certainly is not experiencing the same types of issues” as firms like Zucker Goldberg, a “barrage” of changes in state and federal law has presented more challenges. McCarthy & Holthus has about 75 lawyers, he said, in eight different states, and focuses on “all aspects of default.”
McCarthy said his firm is not experiencing problems from bank clients not paying their legal bills, but he said that increased notice requirements, more oversight and prohibitions to so-called “dual tracking”—restricting lenders from seeking foreclosure while simultaneously negotiating loan modification—have all made his job tougher.
Donald Maurice, who defends lenders in consumer suits, put the regulatory issues in different terms: “When you opened your practice, did you contemplate that a federal bureau … would be supervising?”
“Today, that is a reality,” said Maurice, a partner in the Flemington, New Jersey, office of Chicago-based Maurice Wutscher.
Combine the active CFPB with the increase in Fair Debt Collection Practices Act litigation, and the nature of foreclosure practice has changed.
“There has been an explosion of these types of suits,” Maurice said. “What you’re seeing across the nation … is a consolidation of firms who do foreclosure or even consumer credit collections.”
FDCPA is sending malpractice premiums at those firms “through the roof,” he said.
“In no other area of the law are you subject to strict liability,” Maurice said. “You can be sued for filing a complaint.”
The reasons for the volume of FDCPA suits, according to Maurice, lie in statute and case law.
The FDCPA, as enacted in 1978, exempted attorneys, but that exemption was removed a few years later—at the behest of debt collectors and over the objection of the Federal Trade Commission, according to Maurice. Court decisions including a U.S. Supreme Court ruling in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich have exposed attorneys to FDCPA liability and removed the protections afforded by litigation privilege in such actions, he said.
Taking More Time
New processes with stricter requirements have also led to longer foreclosure timelines.
“If we just take a look at our data at the average time it takes to foreclose, that has dramatically increased,” said Daren Blomquist, vice president at RealtyTrac, which collects and analyzes real estate data.
According to RealtyTrac data, in the second quarter of 2007 the average foreclosure in the United States took 154 days.
In the second quarter of 2015, the average was 629 days.
“On the attorney’s side, there’s four times the expense involved to handle that loan,” said Blomquist, and that can be a problem in a flat-fee business model.
But states’ averages vary widely, Blomquist noted. In New Jersey, the average foreclosure last quarter took more than 1,200 days. In South Dakota, the average was 177 days.
A former Zucker Goldberg paralegal said things started falling apart there when the New Jersey judiciary froze foreclosures in the state as a result of the “robo-signing” scandal. The firm isn’t paid until a file is finished, which is doable when it’s a nine-month turnaround—but untenable when it takes years.
Clients “stopped paying, but they expected us to continue to work,” the paralegal said.
Generally, Blomquist said foreclosures take longer in states that have intervened more in the foreclosure process. Also, he said, some small states simply were not prepared for the volume of foreclosures they began to encounter.
David Dunn, a partner at Hogan Lovells, a global law firm that represents lenders in New York foreclosure cases, said increased scrutiny on the conduct of banks has effectively allowed borrowers’ counsel to “erect roadblocks to effective and efficient foreclosures.”
Dunn, who said he has been litigating foreclosure cases for about six years, said he thinks banks understand that new regulations have been crafted in recent years to address specific problems.
“But everybody needs to understand that the effect of all this rulemaking is that it will make the process slower and more expensive,” Dunn said.
While some geographic areas are seeing an increase in foreclosure filings, firms may have also been affected by a general decrease in foreclosures nationwide, Blomquist said. He credits the overall decline, in part, to government regulations. According to RealtyTrac data, 1.1 million U.S. properties had foreclosure filings in 2014, the lowest since 2006. At its peak in 2010, that number was about 2.9 million.
“The regulation is forcing servicers to find alternatives to foreclosure,” Blomquist said. “At the end of the day we see that show up in the drop-off in foreclosure activity.”
Gina Passarella of The Legal, Leigh Jones of Legal affiliate The National Law Journal and Andrew Denney of Legal affiliate New York Law Journal contributed to this report.
Lizzy McLellan can be contacted at 215-557-2493 or email@example.com. Follow her on Twitter @LizzyMcLellTLI.