Chicago Foreclosure Lawyer Blog

In what is shaping up to be a series of cases, Nevada Attorney General Catherine Masto has filed a civil fraud lawsuit against Lender Processing Services. LPS is one of the largest providers of software and services to mortgage servicers and their network attorneys. Given that the state recently indicted some lower-level LPS officials, this seems to be the next step in the chain. I personally won't be surprised if Nevada follows Massachusetts's lead and goes after the servicers that use LPS next.

The complaint lays out everything that industry observers and consumer rights attorneys have been saying about LPS for years. At 39 pages, it's somewhat of a lengthy read, but the first five pages neatly summarize the facts behind the state's case.

Here's some background: LPS provides document preparation services and specialized software to servicers and their attorneys. LPS was largely unknown outside the mortgage servicing industry until last year when 60 Minutes ran a piece about the robosigning that was taking place at LPS's subsidiary, DocX. At the time, LPS stated that the activity at DocX was nothing more than a clerical notarization error. LPS further stated that it had processes and internal controls in place that ensured affidavits were properly signed.

According to the complaint, LPS has:

engaged in a pattern and practice of deceptive conduct that willfully misled consumers, courts, and the public, resulting in countless foreclosures that were predicated upon false, deceptive and deficient documents that LPS prepared and/or executed and included fees that were mischaracterized and deceptively passed on to consumers.

This single paragraph captures most of the complaint. It describes LPS's attempts to cover up and recharacterize its behavior as innocent clerical errors. The complaint also discusses LPS's involvement in the foreclosure process, which has less exposure to the public. For example, LPS is more than just an administrative middle-man. According to the complaint, LPS "improperly directs and/or controls the work of foreclosure attorneys in the LPS Network."

LPS advises its attorneys how and when to proceed with various steps of the foreclosure process. It also tends to obstruct communication between the attorney and the servicer. This is a problem since the servicer is the client, not LPS. LPS also charges its network attorneys a referral fee for each case that it routes to their offices. As the AG's complaint notes, this is essentially a kickback. It also sounds like fee-splitting, which becomes a major ethical hazard. According to the complaint, these kickbacks are masked as attorney and trustee fees. Those fees are then tacked onto the judgment against the homeowner, which means that ultimately homeowners who lose their homes are paying these fees.

The complaint also does a good job of encapsulating the nature of the foreclosure crisis:

The foreclosure crisis has been fueled by two main problems: chaos and speed. LPS' business model is designed to take advantage of the former by increasing the latter. The faster LPS is able to process foreclosures -- without regard to the accuracy of the documents or the integrity of the process -- the more money LPS makes.

This paragraph sums up the foreclosure crisis for most major players, not just LPS. Servicers tend to make more money foreclosing than modifying loans -- the long-term money is something that honest investors are seeking. The majority of the wrongdoers in the foreclosure crisis make money via volume and speed. For them short-term profit is more important than long-term stability.

Also interesting is the complaint's description of LPS' business model, including the use of LPS Desktop, which is essentially foreclosure management software. Desktop is used to organize and process foreclosure cases and includes prompts and alerts for various stages of foreclosure. Most importantly, it tracks the speed with which network attorneys close out cases. As always, speed is of the utmost importance.

The complaint also explains how LPS is the exclusive contact between the foreclosure attorney and its client, the servicer. Instead of servicers directly retaining attorneys, those who use LPS are connected with attorneys within the LPS Network. Effectively, if the attorneys want business, they will play by LPS' rules and pay the referral fees. For the servicers, it may seem like a value-added service.

The rest of the complaint outlines how LPS failed to prevent robosigning and how it continued to robosign after it said it wasn't. It explains how LPS executed documents on behalf of the servicer, how it executed documents on behalf of non-existent or defunct companies, and how it misled investors about its practices.

What I find most interesting are the parts that discuss how LPS directs and controls the legal process. It would appear that this is done on a software level and a systemic level. On the software level, LPS automates a lot of the decision-making involved in the foreclosure process. Its software also creates deadlines that exceed the industry standard, forcing some firms to compromise the quality of their work to maintain the volume needed to keep LPS happy. Attorneys who consistently miss targets get downgraded and receive fewer or no referrals from LPS.

In addition to the software, systemic issues cause LPS to exert an undue influence on Network attorneys. LPS is often the contact point for the attorneys, not the servicer-client. This means that LPS often directs the conduct of attorneys. This is a huge ethical no-no for attorneys -- non-lawyers should not be directing the legal work of attorneys. Non-attorneys cannot, for instance, hold any interest in a law firm. This is why you don't see the tall-building firms issuing stocks. According to the complaint, LPS non-attorney employees not only directed the activity of attorneys, but trained them and advised them as to how to prepare various pleadings, motions, and other documents. LPS often blocks communication between the attorney and the servicer -- odds are that the answer to an attorney question comes from LPS, not the client.

What it boils down to is that LPS may be engaged in the unlicensed practice of law. Given that its software is used in about 50% of all mortgage loans, you can imagine how many counts of unlicensed practice it may be liable for.

The case is ultimately based on Nevada's unfair and deceptive trade practices act. I hope that it succeeds. Almost every state has a similar statute. Success in Nevada could mean lawsuits from other states. The latest wave of lawsuits has shed some sunlight on the underbelly of the foreclosure crisis -- now we just need more sunlight.

The Chicago Tribune is reporting that at least 1,700 mortgage foreclosure cases in Cook County were temporarily stayed by Judge Moshe Jacobius, Presiding Judge of the Cook County Circuit Court's Chancery Division. Fisher & Shapiro, L.L.C., one of the three major foreclosure plaintiff's firms in Chicago, admitted that it had altered affidavits. The alterations included adding in fees and other costs that were incurred after the affidavit was signed.

It seems that the cases in question were all filed in the the last three years. Fisher & Shapiro was ordered to vacate all judgments of foreclosure and judicial sales that had occurred. It is unclear whether this applies to all 1,700 cases, as I have not seen the order. It is highly likely that some sales will be undone, which could be messy if any of the properties were purchased by third party purchasers.

What this means for Chicagoans facing foreclosure is that those in the affected group now have time to explore their options. No homes will be granted "free and clear" to home owners. However, those exploring short sales and loan modifications will have more time to accomplish their goals. Those simply looking for more time to make alternative living arrangements will also benefit. However, for residents in Chicago's hardest-hit neighborhoods, it also means that the abandoned, foreclosed properties on their blocks will potentially be stuck in limbo that much longer.

The Chicago Tribune doesn't indicate how this revelation came about, but it does highlight the importance of consulting with a competent, licensed attorney before throwing in the towel. The more people that fight their foreclosures, the more likely we are to uncover practices that harm everyone. The court system only works when citizens actively participate in it.

It sounds like the beginning of a lawyer joke, but sometimes reality has a strong anti-humor bias. According to the Chicago Tribune, an Illinois attorney has been indicted for allegedly defrauding his clients. His practice area was foreclosure defense.

I really don't have much to say. The man and his wife are both being charged. They're innocent until proven guilty. If these current allegations are true, it reflects poorly on the profession as a whole. At the same time, if the trial process is fair, and the attorneys on both sides conduct themselves in a professional manner, then the system is working as intended.

That said, make sure that you fully vet an attorney before hiring him. Initial consultations are an opportunity for you to learn about your case and about the attorney. Make full use of them. It's also wise to look up the attorney at the Illinois ARDC website. If the attorney has a history of bad conduct, you will find the results of any disciplinary action there.

Matt Weidner's blog ( via his Twitter feed) led me to an editorial written by retired Judge H. Lee Sarokin. During his tenure as a federal judge, he overturned the triple murder conviction of Rubin Carter. I was a bit surprised to read his OpEd piece at the Huffington Post.

Judge Sarokin questions whether those defending foreclosures veer into unethical territory by virtue of their practice. At first glance, my response was to stop reading and post something in an apoplectic fugue. However, the piece's tagline is a bit more inflammatory than the actual article.

Judge Sarokin acknowledges that attacking a lender's standing (whether it actually owns the note and mortgage) is worthwhile. The rest of his piece is misguided hand-wringing and creatively mis-stating the issues. I will address those arguments after the jump.

Continue reading "A Response to Judge H. Lee Sarokin" »

Several colleagues emailed me a link to the same New York Times article over the weekend. Given the overwhelming popularity of the link and the fact that I have something to say about it, I give you this post.

Some Florida foreclosure defense attorneys are using mortgages to bill their clients. At first glance, this seems like a bad idea. At second glance, this seems like a supremely bad idea. Based on the deals described in the NYT article, these attorneys are putting themselves into the role of a creditor. They are also asking clients to pay them a portion of the money they saved by modifying their loan. This is the same thing as a contingency fee, but the money comes from the client, not the losing party on the other side.

One of the attorneys interviewed stated that he would never foreclose on any of the mortgages he issues. What, then, is the point of securing the loan/legal bill against the property? The entire point of a mortgage is to take the property attached to it if a borrower defaults on his or her payments. Issuing a mortgage that you never plan to enforce makes as much sense as buying an airplane that you never intend to fly.

This also raises serious ethical issues. If foreclosure defense attorneys become mortgagees, and their clients become mortgagors, doesn't this create an inherent conflict of interest? It certainly walks a fine line. An attorney retained to defend a foreclosure then secures his fees against a property, and includes in those fees some of the money a home owner "saved" by having the loan modified. So did that home owner really save the money? If anything, this second mortgage payment could put the home owner at risk of default again -- either to the primary lender or to the attorney. Which creditor does the borrower choose to pay? Could this create a situation where it appears that an attorney is holding a client's home hostage?

If this practice becomes widespread, I would expect that the various state bar associations will begin developing rules to deal with it. This could mean banning the practice or providing guidelines for its use. Although I'm normally all for innovative billing strategies that move the practice away from the billable hour, this particular strategy doesn't pass my initial smell test.

I recently came across a lecture that Abraham Lincoln wrote in 1850. It was to be given as a law lecture. In the 1800s, people became attorneys a bit differently than they do today. If you couldn't get a job working for an attorney, you could simply get the various legal texts of the day to gain a foundation. After that, you took an oral bar exam, and were then licensed. Although admission to the profession has changed since then, Lincoln's advice to attorneys is still applicable today.

Here is one of my favorite parts:

Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser -- in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.

Here's a link to the entire thing.

On July 9, Norton Helton, a former Chicago attorney and radio personality, was found guilty of engaging in a mortgage rescue scam. Although this was done while the housing market was still high, these kinds of scams also work when the market is down.

It is very important that people facing foreclosure understand these scams so that they can be avoided -- what seems like a great deal at the time is often a vehicle for leaving a homeowner high and dry. Some red flags to look for based upon the facts of the Helton case are:

1. Deals where you transfer your property to another person, group, or company. These deals usually include a promise that the homeowner can remain in the property and rebuild credit. In a perfect world, with repaired credit, the homeowner would be able to repurchase the property from the "investor." In the case of these scams, it doesn't work that way.

2. Promises of credit "scrubbing" or credit repair. Nobody can magically repair credit, it takes time and responsible spending habits (as well as the responsible use of credit) to rebuild a score. Money given to someone promising to repair your credit is money that is ultimately wasted.

3. Scenario #1, but with the promise of bankruptcy assistance as well. Removing a home from your assets and liabilities may seem like a good idea. It is also likely fraud, in particular, if the plan is to repurchase the home after discharge.

The risks are wasted money and losing your home. These scams often loot the property for any equity value, meaning that the investors extract as much money from the property as possible. Not only does this make it that much more difficult for the scammed homeowner to repurchase the property, but it often leaves homeowners facing foreclosure on a property they no longer own.

As with anything, if it sounds too good to be true, it may not be true. Before committing to anything, seek out a competent attorney in your area to discuss your options.

As reported on CNN.com, the SEC has charged Goldman Sachs with fraud relating to their involvement with subprime mortgage-backed securities. The charges center around allegedly undisclosed conflicts of interest between Goldman and a hedge fund named Paulson & Co. According to the SEC, Paulson & Co pooled mortgages that were then sold to investors as mortgage-backed securities. The investors, who were betting that the market would go up, were not told that Paulson & Co. had shorted the exact same investment pool.

For those who don't know a bunch about the markets, "shorting" something basically means that you borrow and sell the stock before you own it, with an obligation to eventually purchase it at a (hopefully) lower price. If all goes well, you end up with a nice profit. In the case of Paulson & Co., their nice profit was about $1 billion, according to the SEC.

So how did Paulson know that this specific CDO would drop? Allegedly, Paulson & Co. pooled the securitized mortgages, picking them based on the likelihood that they would fail.

I find this to be a highly interesting situation, and look forward to its development. As the SEC continues to examine transactions, it may very well uncover more of these situations. You never know what you'll find when you start turning over rocks.

Some law firms are making the move to social networking sites like Avvo, Martindale Hubbel Connected, Linkedin, Facebook, and Twitter. As Christine E. Mayle indicates, there are some ethical pitfalls involved in social networking. Even blogs (or "blawgs" as industry wags like to call them) can cause problems. More detail and though on these ethical issues can be found after the jump.

Continue reading "Ethical Pitfalls of Social Networking" »