After reading a hit piece published last week
by the New York Post
on Steven J. Baum, P.C.
—a law firm that represents lenders/servicers in foreclosure actions within New York state—I’m starting to wonder what the “new normal” in our nation’s mortgage markets really will look like.
The story, in case you missed it, is based on the revelation that Baum’s law firm represents banks—and in that capacity has filed thousands of foreclosure motions in New York state. Big, bad JP Morgan Chase
[stock JPM][/stock] has Baum doing its evil bidding, and taking away good New Yorkers' homes without being able to so much as prove that the bank even owned the mortgages in question.
At least, that’s the New York Post
’s version of the story. Truth is, of course, far more nuanced. The Post
’s story takes its cue from damning quotes provided by consumer bankruptcy attorneys.
"In 85 percent of the cases I handle, the paperwork submitted by the bank or mortgage service company is not in order," Linda Tirelli, a consumer bankruptcy lawyer based in White Plains and Stamford, CT, is quoted by the New York Post
What do you really expect a consumer bankruptcy attorney to say? That a bank is actually doing a good job
managing their paperwork? That the bank is being reasonable during bankruptcy? Of course not: There’s a meal ticket to be had here.
As for Baum’s office and JP Morgan Chase, both are relegated simply to the “no comment” bin. Baum’s office is bound by attorney-client privilege, meaning it can’t comment without client consent—and Chase can’t comment to the press on any borrower’s particular situation, unless that borrower first consents to the information being shared.
Which makes all of this a one-sided press battle, to say the least.
This isn’t the first time a lender/servicer and some legal eagles have been dragged through the mud
—and it won’t be the last, either. You’d think by now there would have been some discussion in the industry about how to better manage the reputational risk that comes with being dragged through the press like this. You’d think.
Because what’s needed is a more lucid debate over how to fix problems in loan servicing—and there are problems, to be sure. Not the kind of Nefarious Lender Inc.™ problems much of the financial press would have you believe, mind you, but the sort of problems that come with a servicing function that has long confused the speed of legal work with the quality of legal work.
The problem here isn’t that Steven Baum’s office has filed some 12,000 foreclosure actions. It’s not even that the banks can’t produce the original note (because in most cases, they can, with requisite additional cost and effort).
And that’s precisely the problem: cost and effort. Baum’s office—and hundreds of other law firms like it—operates on volume because it must operate on volume. A flat legal fee structure keeps margins incredibly low. No law firm can afford to represent a bank at $650 per file or so, if it’s only getting 25 files per month. Nor can law firms afford to put attorneys on every file at that sort of flat rate, leaving paralegals to handle preparations for most initial pleadings.
All of which is fine and well during more stable times in the housing market. But with delinquencies skyrocketing, and courtrooms bursting at the seams? The natural solution here begets the very problem at hand: Law firms representing creditor's interests don’t hire more lawyers, of course. There is no incentive for that. They hire new paralegals instead, many of whom don’t understand the difference between what’s written on a land title record and what’s written on the back of a box of Cheerios.
Worse yet, law offices like Baum’s are measured on how quickly they can file their initial pleadings with the court. I mean, really and truly
measured—by software workflow solutions designed to drive ruthless efficiency through the mortgage servicing value chain. Move too slow getting on the court’s docket, and watch those thousands of files move to another office within 90 days.
There is very little room in this sort of environment for risk management, or quality control—or even representing a client’s best interests, truth be told. Law firms will often skip the step, for example, of doing a search of the land records to verify that the last recorded assignment puts the foreclosing entity into current first-lien-holder status.
Why be so sloppy? Because, put simply, it gets business from the banks. In fact, many servicers will move their business if a law firm can come up with a new and novel way to speed up the foreclosure process—or if a firm won’t follow a bank’s own instructions to speed up the process. I’ve personally seen law firms lose clients because a bank’s own front-line staff is making unreasonable demands; there’s always another lawyer waiting in the wings, willing to push the risk envelope for the sake of a few more files in the pipeline.
At some point, the envelope gets pushed too far. We’ve seen that now numerous times.
In the end, this story ends like any other: You get what you pay for. And apparently, banks like Chase remain content to pay out in settlements to consumers if those consumers can spill enough ink in public, rather than paying for better legal work up front. It’s a move that will only hurt Chase’s reputation (read: more cost
) and encourage more and more consumers to yell even more loudly (read: more cost
), which further sullies their brand (read: more cost
), perhaps to the point that consumers no longer want to put their business with the bank (read: substantial cost
Call me a contrarian, but maybe—just maybe—it’s time to at least consider how much it would cost to get some better lawyering involved in the foreclosure and bankruptcy process. I can guarantee you that law firms like Baum’s would be quick and ready to adapt to such a change.
Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine.