Last Friday, dre cummings posted a blog describing the St. John's University School of Law’s conference entitled “The Fall of the Economy”, sponsored by the Journal of Civil Rights and Economic Development and the Ron Brown Center for Civil Rights and Economic Development which is led by my colleagues Professors Leonard Baynes and Janai Nelson. The day’s discussion was lively and insightful and included the roles that Wall Street, mortgage lenders, and regulators played in causing the economic downturn of 2008/2009. During the Q&A, a lawyer in the audience, addressing a panel on the mortgage foreclosure crisis, engaged in the now familiar victim blaming we’ve heard in the past few months. Her position was that homeowners who were targeted for subprime loans were solely responsible for the mess they find themselves in when banks foreclose on their homes.After the conference, I realized that we had not talked about the role that lawyers played in the subprime debacle that has caused a mortgage crisis in many communities. In the last few months, lawyers have filed suits that include claims against mortgage lenders accused of discriminatory lending practices. Lawyers are also representing subprime borrowers facing foreclosure. When analyzing the causes of the crisis, we should ask about the lawyers who represented borrowers who were victims of predatory lending practices. Some brokers acted as advocates for borrowers but others told borrowers that they did not need a lawyer in order to take advantage of them. But what about the many subprime borrowers who did have legal representation? How could these lawyers allow the kinds of predatory lending practices about which so many have written. And, of course, there were lawyers who victimized their client borrowers in order to earn legal fees.
The paper you link to describes "predatory lending" in the following manner:
ReplyDeletePredatory lending is characterized by a number of specific practices including making a loan for more than the borrower can repay, repeatedly refinancing a loan without benefit to the borrower, charging excessive prepayment penalties, and financing single premium credit insurance.
If we accept this definition, then every mortgage made in the country of Canada, which has not experienced a mortgage and banking crisis, is a "predatory loan".
Professor Mark Perry, of the University of Michigan, describes the Canadian mortgage and banking system:
Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages.
Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. (This is done for the banks benefit.)
About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront.
Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States ...
Due North: Canada’s Marvelous Mortgage and Banking System, The American
As for writing loans for more than the borrower can repay, this posting in the New York Times, "Economic View" section dispels the myth that borrowers were the ones being exploited:
There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.
In other words, many of the people now losing their homes committed fraud.
The New York Times, Economic View
continued ...
ReplyDeleteWith all the talk about "Wall Street" and "brokers" being the guilty parties, it's easy to overlook some of the worst culprits - lawyers. This post at criminal defense attorney Scott Greenfield's "Simple Justice" blog, outlines their involvement:
Given my experience with defendants and targets in mortgage fraud, I'm surprised that more law offices haven't been the target of subpoenas and seizures. Shocked really ... I've come to realize that there are a bunch of real estate lawyers who ran closing mills and were integrally involved in the frauds of their mortgage broker clients. The brokers referred them business, and often involved them directly in their scams by way of investment as well as straw-buyers, They were hip-deep in fraud.
The lawyers made a ton of money participating in these schemes ...
What shocks me is that they have largely been ignored in the mortgage fraud investigations. When law enforcement runs down the list of bad deals, whether because of fraudulent appraisals, fraudulent applications, straw-buyers or any of the other various mechanics of these schemes, they will find the same names appearing time and again. The names of lawyers representing sellers and buyers.
Some of these lawyers were doing four or five closings a day. Some were doing only one, but owned a piece of everything that was sold. When they represented the buyers, they never mentioned they had an interest in the property being sold. When they represented the banks, they never mentioned that they knew the buyers were strawmen, used to scam the banks out of mortgage money on a fake flip based on a scam appraisal showing a 50% increase in value in six months.
Mortgage Fraud Costs Lawyer 30 Years of Files, Simple Justice
Makes you wonder, with so many upright officers of the court involved, how could anyone have fallen victim to a "predatory loan"?
Anonymous, 3.13.10, 4:58 pm.
ReplyDeleteUh,anonymous, the title of Professor Wade's post was "Let's Talk About the Lawyers Who Represented Borrowers Who Were Targeted for Predatory Loans." The purpose of the post, as I read it (perhaps you should read too, before posting comments) was to query the role of lawyers in the financial market crisis. In fact, your concluding question parrots the very question that Professor Wade asks in her post: "When analyzing the causes of the crisis, we should ask about the lawyers who represented borrowers who were victims of predatory lending practices."
Perhaps you should actually read my post, I did talk about the lawyers - they were crooks.
ReplyDeleteI found this post to be very insightful. Some of the lawyers representing subprime borrowers probably were to blame for instances of predatory lending against their clients. On the other hand, I'm sure there were lawyers who did their best to prevent the victimization of their clients. While I believe that it is important to determine the sources of the predatory lending crisis, the focus should be on preventing predatory lending.
ReplyDeleteOne important side note here is to quash the belief that mortgage brokers created this mess. The rules to qualify a person for a mortgage came from Wall Street. To get more "paper" to sell as securities they kept lowering the guidelines for qualification, down payment and credit score thus more people could qualify for a mortgage - even though they could not really afford it. Of course mortgage brokers made some profit but they were only following the rules that were given to them. In fact the people on Wall Street actually taught the brokers how to market their products. An entire industry was wiped out and the first casualties of unemployment in mass were those in the mortgage industry - brokers, loan officers, processors, underwriters, secretaries, IT people and even the cleaning crews. It’s important to focus on where the sources of these scams were coming from and to not just point the finger at those who were lead blindly.
ReplyDeleteThese lawyers are not a good examples. How could these lawyers allow the kinds of predatory lending practices and victimized their client in order to earn legal fees.
ReplyDelete