Distressed Homeowners and the Legal Profession

It’s impossible to miss the dire news for US homeowners over the past few years.  Foreclosures have gone from being relatively uncommon to making up a wide swath of the legal notices in the newspaper.  Advertisements for short sale and loan modification help have been plastered everywhere.  Lawyers have been called in to assist thousands (millions?) of struggling homeowners, and most of those lawyers have put forth their best efforts in a rigged game.

Along with financial strife, lawyer involvement, and a deck stacked against success comes a huge number of State Bar complaints by disgruntled clients.  The State legislature responded by passing SB 94, which prohibits attorneys from taking any fees up front (from even placing retainers in their trust accounts) for foreclosure-related services such as loan modifications, and the Bar has responded by actively prosecuting attorneys who allegedly took advantage of the financial straits of their clients and committed misconduct against them.  (The result of SB 94, as you may expect, is that many attorneys will no longer work in this area, as they cannot expect to be paid.  Since we are all trying to make a living, a practice area with a low chance of payment does not attract many folks.)

The Bar’s latest actions include taking over the practice of a bankruptcy attorney who allegedly allowed his practice to be run by non-lawyers and filed fruitless bankruptcy petitions for clients whose homes were already past saving, and filing disciplinary charges against an attorney who allegedly committed multiple acts of misconduct relating to distressed homeowner services.

I have no involvement in these specific matters, and I make no comment whatsoever on their merit.  My comment is on these matters generally and the Bar’s task with respect to them.

I have had some personal involvement in loan modifications, and I absolutely believe that the game is rigged.  Banks have no intention of granting most loan modifications.  They have an internal circular system of requesting documents, getting them, losing them, asking for them again, asking for them again because now it’s taken them so long to look at them that they’re too old, losing them, etc.  When a homeowner actually does provide every paper requested each time it is requested, and the bank runs out of the paper game to play, they come up with reasons to deny the modification that may or may not make any factual sense.  In one matter I’m familiar with, the homeowner received two letters denying the modification — one saying that she was not at risk of default and was current on her loan with income to sustain ongoing payments, the other saying she did not have enough income to make even a modified payment and that she was tens of thousands of dollars delinquent.  Same bank, same loan, same homeowner.  Nonsense.

The rigged game means that most homeowners will not have any success in getting a loan modification, whether they are going at it alone or with counsel.  It being a losing game, most who hire counsel will be angry and frustrated and looking for someone to blame.  The bank is a good target of anger, and so is their lawyer.  No wonder, then, that so many complaints have been received against loan modification attorneys.

Now this does not mean that there aren’t scams out there.  I’ve heard stories (before SB 94) of attorneys refusing to even meet with a client or have a phone consultation without a retainer of $1500, $3000, or more.  When news breaks and there’s a lawyer who is reported to have had hundreds of loan modification clients and there are dozens of stories of paying fees and hearing absolutely nothing from the lawyer, I do tend to think there’s something to the allegations of misconduct.  However, the whole process stinks so badly that the Bar must be knee-deep in these complaints and trying to wade through which ones actually have merit as to the attorney misconduct and which are in reality the banks engaging in the wrongdoing.  It makes me happy to be on this side of the aisle right now.

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