The Predatory Lending Mortgage Crisis: Play Your Part
Roger Bertling is a clinical instructor in the Predatory Lending/Consumer Protection Clinic at the Legal Services Center of Harvard Law School.
With the predatory lending mortgage crisis splashed all over the headlines, many young attorneys are wondering how to get involved and assist consumers who have been victimized by predatory lenders and saddled with mortgages they cannot afford. Many of these borrowers can be helped by some hard work and the application of legal skills that many of us already have. Below are three areas in which you can help.
Negotiation . As more lenders find themselves with more and more foreclosed loans and loans nearing foreclosure, borrowers and their attorneys have opportunities to negotiate their mortgage terms.
For those borrowers who wish to keep their homes, the typical negotiation involves a loan modification—a mutually agreed upon alteration of the terms of the mortgage contract. A common loan modification is a temporary or permanent interest rate reduction (or a change of the adjustable rate into a lower fixed rate) and a requirement that the arrears are paid off over a specific period of time or placed on the back of the loan. Lenders often want a good-faith, upfront payment in these types of negotiations.
For those who do not wish to or cannot afford to keep their homes, a common negotiation is a deed in lieu of foreclosure; this type of negotiation is one where the borrowers deed the house back to the lender rather than go through foreclosure. A “short sale” is another common negotiation in which the borrower finds a third party who agrees to buy the home for less than the borrower owes and the lender agrees to write down its mortgage to the sale amount.
Be aware that in most cases a loan has been sold off in pieces to a myriad of investors, so your negotiations will not be with the investors directly but with the servicer—a company hired by the investors to manage the mortgage. Servicers sometimes have limited discretion, but as the mortgage crisis deepens, they are gaining more power to rework loans.
Also, be aware of potential tax consequences in any type of negotiation that results in forgiveness of loan principal.
Counseling. Homeowners in financial crisis are often bewildered by the language of their loans and do not understand their options. They need to discuss their loans with an attorney.
When counseling a financially distressed borrower, remember that the homeowner simply may not be able to afford the mortgage, even if the loan is rewritten with a reduced interest rate and with arrears put onto the back of the mortgage. This is particularly true in high-cost (and high-mortgage) metropolitan areas. In the case of property with declining value, a homeowner needs to decide whether it is worthwhile to continue to throw money into such an asset. A good attorney can help the borrower decide the best course, while an attorney who only paints rosy scenarios for her client is not being an effective advocate. Sometimes a borrower needs to cut her losses and walk away.
Litigation . Many of the loans resulting in foreclosure today are filled with violations of federal and state law and are ripe with litigation opportunities for intrepid young attorneys. Having a working knowledge of the federal Truth in Lending Act, state statutory lending law, and common law is extremely helpful in litigating a case; knowledge of bankruptcy law is extremely helpful as well for both counseling and litigation. It is always a good idea to consult with a more experienced attorney who can assist in reviewing loan documents. Also, remember there is always the possibility of recovering attorney fees and costs under the various fee-shifting statutes.
However you decide to get involved, many homeowners are out there waiting for your help. Stay positive, think of it as a learning experience, and you may even have fun.
• Mortgage Crisis: What the Truth in Lending Act Can Do for Borrowers (Audio CD Package). 2007. PC # CET07PBPC. Center for CLE and Section of Real Property, Trust and Estate Law.
• Anatomy of a Mortgage: Understanding and Negotiating Commercial Real Estate Loans. 2001. PC # 5430423. Section of Real Property, Trust and Estate Law.