Let’s Talk About the Lawyers Who Represented Borrowers Who Were Targeted For Predatory Loans

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.

Fed's Lose Major Subprime Fraud Case: Bear Stearns Hedge Fund Managers Acquitted

On Tuesday of this week, the Department of Justice suffered a major set-back in the first trial stemming from the subprime and financial markets meltdown. Ralph Cioffi and Matthew Tannin, both former Bear Stearns hedge fund managers, were found not guilty on all charges by a U.S. District Court jury in Brooklyn, New York. Federal prosecutors alleged that Cioffi and tannin falsely inflated the value of their portfolios despite knowing that the mortgage-backed securities in their funds were at risk of collapse.

The Bear Stearns hedge funds managed by Cioffi and tannin collapsed in June of 2007. Investors lost $1.6 billion. Both Cioffi and Tannin were charged with numerous counts of securities fraud, wire fraud and conspiracy. Had they been convicted, both Cioffi and Tannin faced upwards of 20 years in prison. Additionally, Cioffi faced an added 20 years on an insider trading charge alleging that he shifted $2 million of his own money out of a poorly-performing fund to a separate fund that he oversaw. A number of jurors indicated that the government’s theory of the case and allegations just did not stick. Some jurors indicated that the government seemed to be trying to unfairly hold Cioffi and Tannin responsible for the impending collapse of financial markets, particularly at a time when even the best economists were uncertain about the direction of the markets.

Cioffi’s and Tannin’s defense attorneys argued that the two men were overly enthusiastic about the market and their funds performance. The defense also argued that the men had no way of knowing what lay ahead: namely, the subprime mortgage crisis and the housing market bubble burst of 2007.

In a political and economic climate where average everyday people want to draw “blood” from grossly overpaid executives, this is a tough set-back for the Department of Justice. This case was the first high-profile subprime mortgage case to go to trial. “The month-long trial was viewed as a barometer for future investigations of possible fraud at other firms that may have exacerbated last year’s financial meltdown.” Reportedly, former executives at AIG and Lehman Brothers are under investigation for their roles in the financial meltdown. Hopefully, the Department of Justice has learned a value lesson. If not, surely the defense bar will be taking notes of the arguments and theories put forward by the Cioffi and Tannin defense teams.

The Subprime Mortgage Crisis: Debunking Myth and Reality?

Recently, Yuliya Demyanyk, a Senior Research Economist, at the Cleveland Federal Reserve Bank issued a very interesting Economic Commentary entitled “Ten Myths about Subprime Mortgages.” Demyanyk contends that many of the popular explanations for the subprime crisis were in reality myths. Further, Demyanyk takes the position that empirical research proves that the causes of the subprime crisis are multifaceted and complicated; going far beyond mortgage rate resets, declining underwriting standards, or declining home values that we typically are quick to point a finger towards.

In addressing and debunking the ten myths she perceives about the subprime mortgage crisis, Demyanyk makes the following observations:

* Subprime mortgages went to all kinds of borrowers, not just borrowers with damaged or impaired credit.

* Subprime mortgages did not promote homeownership.

* Declining home prices and values did not cause the crisis. Declining home prices served to reveal the quality of subprime mortgages that had been deteriorating for years.

* Declining underwriting standards did not trigger the subprime crisis. Yes, standards were declining, but not to a level to account for the enormous rise in mortgage defaults.

* Borrowers did not use their homes as ATM’s to extract cash from home equity loans and lines of credit. Data shows that mortgages originated for refinance performed better than mortgages originated solely to buy a home.

* Mortgage rate resets did not solely cause the subprime crisis. Fixed rate mortgages showed all the signs of distress that adjustable-rate mortgages showed.

* Subprime borrowers with hybrid mortgages were not offered low “teaser rates.”

* The subprime mortgage crisis was not totally unexpected.

* The subprime crisis in the United States is not totally unique; it follows a classic cycle of boom-and-bust that has been observed historically in many countries.

Demyanyk’s Economic Commentary makes for an interesting read to better understand the complicated causes of the subprime mortgage crisis. I tend to agree with some of Demyanyk’s assertions. On the other hand, I tend to disagree with some of Demyanyk’s assertions. Again, Demyanyk’s Economic Commentary is an insightful and thoughtful piece. Do you agree or disagree with Demyanyk’s perspective? I look forward to hearing what you think about the causes of the subprime mortgage crisis.