“At the risk of losing their homes if they didn’t, scores of Colorado homeowners struggling to avoid foreclosure in the past year were each forced to pay hundreds of dollars in lawyer charges for phantom court cases against them, a Denver Post investigation has found.” In 126 of the episodes, the paper reports, no foreclosure lawsuit was actually filed. Related reporting on allegations against Colorado foreclosure law firms here, here, etc.
Along with the Colorado attorney general, various other law enforcers both state and federal are scrutinizing the billing practices of creditors’ law firms looking for evidence that they’ve been evading the fee and cost reimbursement limits for foreclosures that Fannie Mae, Freddie Mac and FHA prescribe on loans they own, guarantee or insure. [Paul Jackson, Housing Wire via Funnell]
Here’s why: it turns out that many of the major law firms responsible for managing foreclosures for the GSEs also have a controlling interest in the ancillary service firms that generate the variable fees that appear as “costs” on the lawyer’s bill. Many law firms either outright own, or their partners have a significant interest in, the company that is posting and publishing notices; or they may own or have an interest in the company that manages process of service, as well.
Such arrangements are not illegal, but could land the firms and mortgage servicers in hot water if it develops that they have connived at fee padding by the ancillary firms. (& welcome Above the Law readers). More: Heather Draper, Denver Business Journal (and thanks for quote).
Inspired in part by the work of Cornell law professor Robert Hockett, the city of Richmond, Calif. is planning to 1) use eminent domain to seize private mortgages for considerably less than their actual worth; 2) cut a deal with existing residents of the homes to install FHA mortgages in place of the seized mortgages; 3) use the windfall surplus — derived by paying the private mortgage holders less than the actual value of their forcibly seized holdings — to subsidize the local residents, thus buying their political favor, as well as leaving a goodly sum to pay off the private outfit called Mortgage Resolution Partners that’s pushing the scheme (written up sympathetically in a recent New York Times account).
What could go wrong, aside from to the spirit of the Constitution and the rule of law? Gideon Kanner points out that even California eminent domain law still requires the payment of “fair market value, not some bargain basement figure pulled out of thin air”:
…we believe that not even California courts will stand still for that. Why not? Because under our law, if the condemnor tries to lowball too much, and makes an unreasonable pre-trial offer, it may have to pay the condemnees’ attorneys’ and appraiser’s fees, plus other litigation expenses, on top of the “just compensation” required by the constitutions. And, of course, any diminution in value brought about by the the market’s reaction to the imminence of the condemnation, cannot be considered in determining fair market value. The property has to be valued as if unaffected by the condemnor’s plans or by any preliminary steps taken toward the condemnation. Cal. Code Civ. Proc. Sec. 1263.330.
For other reasons the scheme may prove much more expensive to the city of Richmond and its taxpayers, see Ilya Somin [more, yet more] Other commentary: Matt Welch, Richard Epstein. Earlier here, here, etc.
A natural experiment: Virginia law allows foreclosures to happen rapidly, Maryland law delays them. Which state has bounced back more smartly from the housing crash? [Michael Schearer, earlier]
Thanks to new federal banking and mortgage guidelines with $1-million-a-day penalties for noncompliance, banks are scrambling to fire any employee who has previously been convicted of a crime involving dishonesty. Among those tossed out: a bank employee with seven years’ service who used a slug in a washing machine in 1963, and a 58-year-old customer service representative with a shoplifting conviction forty years ago. A lawyer says thousands of employees have been fired under the new rules. [Des Moines Register/USA Today via ABA Journal]
Prof. Bainbridge among others is blowing the whistle. For more, see Ira Stoll, Kevin Funnell, Steven Greenhut and related, Felix Salmon (role of Cornell lawprof Robert Hockett).
Kevin Funnell at Bank Lawyers Blog is a bit cynical about the Department of Justice’s headline-ready threats of enforcement action:
[The DOJ claims] appear to be based upon consumer advocates’ claims that the bank takes better care of foreclosed-upon real estate it owns in neighborhoods where white people live than it does in areas where minorities live. I suspect that the bank will assert that (a) any rational real estate owner is only going to invest money in a piece of real estate where the owner has a realistic chance of recouping that investment through a higher sales price, (b) that such recoupment decisions are made on a property-by-property basis based upon objective data like recent comparable sales prices and fair market valuations, (c) that the economic reality-driven facts of life are that many more such properties are located in majority-white neighborhoods than in minority neighborhoods, and (d) there has been no intent to discriminate, merely to minimize losses…. As we’ve previously noted, the DOJ is on a jihad against lenders based upon “disparate impact” theories that the DOJ knows, in its heart-of-hearts, are highly fragile when exposed to the light of logic, the kind of logic applied by the US Supreme Court. Justice will likely pursue Wells Fargo and try to squeeze some dough out of it before the highest court eventually shuts down this racket.