MBS and Foreclosures Expose Our Degraded Legal Profession

We lawyers shrug off the ubiquitous jokes because once wronged, people want us. But in the socially crucial contexts of mortgages, foreclosures and securities, lawyers have become a new kind of joke, one that should shame us all.

Failed Securities Counsel

By now many are realizing that the bankers lied materially and often about the mortgage loans they packaged into securities and sold to suckers like pension funds and Fannie & Freddie. But stop and think about that–where were the lawyers?

Underwriters’ counsel and issuers’ counsel should never have let those deals go through. Heck, in-house counsel shouldn’t have signed off. And yet the deals were done.

The securities-related lawyering failures didn’t stop once the securities were created and sold. They also involve how the securities are managed-”serviced”- in an ongoing way. As Michael Olenick exposes here, servicer misconduct (including servicers’ foreclosure counsels’ misconduct), has made things much worse. Indeed, catastrophic costs will soon be realized. If the legal profession in this area were still a profession, Olenick’s case study shouldn’t be possible.

That is, it should be impossible for investors to be told that a mortgage “in” the security is current when a judge has ruled the mortgage  can’t be enforced. (Well, strictly speaking, the mortgage in Olenick’s example isn’t labelled ‘current’; it’s simply computer coded by the servicer, Ocwen, the same way current loans are, so it’s indistinguishable from a current loan.) Worse, the security in Olenick’s example is in a key market index for such securities.

So is the entire market is distorted? I mean, given everything we know about foreclosure fraud, how likely is it that this loan is the only mis-coded one in this security, or in the index? Maybe regulators and law enforcers should start checking. Of course, that would require regulators and law enforcers that actually want to check.

Forget our failed government; why is Ocwen’s in-house or outside counsel allowing this misleading coding?

Foreclosure Business Model Destroys the Legal Profession

The corruption of our legal system is even worse at the individual foreclosure level. For the uninitiated, here’s how most banks deploy “lawyers” in foreclosures:

A bank computer system says foreclosure should start. Another computer system “refers” the case to a “network” law firm or attorney. The network firm fills in blanks in papers, requests other papers (which are often created on demand, aka evidence manufacture), and sometimes creates the papers themselves, by signing in the name of MERS. In those cases, the lawyers allegedly transfer property from the original creditor to the plaintiff. That’s a neat trick–your client needs to prove they own an asset? Put on a MERS hat and sign the papers giving it to your client. The network firm then files the papers, and if needed, shows up in court.

If the homeowner contests the foreclosure or for any other reason it becomes necessary, the lawyer sends a message to the non-lawyer vendor running the “network” of law firms using the computer system. The vendor sends back answers, typically without communicating directly with the lawyer’s bank client, except that the vendor might have access to that bank’s computer systems.

This type of communication creates tremendous problems for homeowners in bankruptcy and foreclosure. Indeed, a frustrated bankruptcy judge ordered HSBC to tell “its” lawyers that they should feel free to contact the bank as needed because so many problem resulted from the vendor system. I detailed another example of how this system damages homeowners here, in a case when the bank twice tried to foreclose on homeowners who were current.

Lisa Epstein uncovered a different kind of example of these communications that the network attorneys accidentally filed in court. In the communications, the lawyer is asking “BAC Affidavits” for guidance on how to handle a tricky situation: the lawyers are foreclosing in the wrong name. Note, “BAC Affidavits” isn’t part of Bank of America; apparently it’s someone or some department within Lender Processing Services. BAC Affidavits and the lawyer agree to correct the record only after the foreclosure is complete in order to avoid paying the relevant homeowner association more. Nice.

Olenick’s example of foreclosure lawyering I mentioned earlier includes a false lost note affidavit, an in-credible description of the note’s discovery, promise to produce it, and reneging on that promise, plus a crazy assignment of the mortgage. Much more on foreclosure evidence manufacture here.

Mortgage loan documentation and the surrounding lawyering is such a mess, New York Courts shut down foreclosures just by requiring attorneys stand behind their filings, and Nevada similarly slowed foreclosures to a crawl by criminalizing common types of evidence manufacturing. When New York initially imposed its rule, I talked to Mark Starkman, an attorney who forecloses for folks who hold the loan they make. He had no concerns about the rule, since he made sure the papers were done right at the outset, and he kept them in his vault. In short, he was still a professional lawyer.

Don’t Really Need A Lawyer In the New Business Model

When foreclosure counsel don’t need to talk to clients, don’t need to exercise independent judgment, and can make up any missing evidence on demand, why is law school necessary? At least one major Pennsylvania foreclosure firm realized that, as a practical matter, it wasn’t. The firm empowered its paralegals to prepare foreclosure filings, sign the name of an attorney who never read the documents, and give the docs to courts as if the attorney had. Unfortunately for Pennsylvanians, that practice, which the named partners testified was standard at their firm, may constitute the illegal practice of law in Pennsylvania. That’s what this lawsuit says, and if it’s right, it throws all affected titles into question.

I originally wrote about that case in December of 2010; the case is still pending, now styled as a class action, and is languishing in discovery. It’s an oddball case, filed by an offended attorney on behalf of the profession, and has yet to reach the merits of the issue. However, pro se homeowners filed a copycat action in March, 2012 to undo the foreclosure completed on their property two years ago, and that case may reach the merits soon. The next step should be a judge’s ruling on the firm’s and Bank of America’s motions to dismiss. If the judge keeps the void-judgment-because-nonlawyers-filed-suit part of the case alive, all bets are off. Foreclosed homeowners throughout the state could file similar suits. Pennsylvania titles would be a huge mess because lawyers decided their business model and convenience trumped the actual legal requirements they as professionals were supposed to uphold.

Despite the potentially devastating consequences, the Pennsylvania firm’s use of non-lawyers to do lawyers’ work seems tame compared to the corruption that was the David Stern firm. And there’s lots of foreclosure mill rocks to turn over, with lots of other ugliness hidden beneath.

Sadly, the legal profession has failed to defend itself. The state bar associations have all the power they need to clean house and change this status quo, but they have not. Why?

Note, this post was lightly edited for clarity and to fix typos hours after it was originally published.

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