Foreclosure Firms Still Feeling Effects of Mortgage Crisis

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Summary: Many foreclosure firms have been forced to close their doors, due to increased requirements on banks and lenders.

Close to a decade after the 2008 financial crisis, law firms whose clients are primarily lenders and servicers in foreclosure actions still feel its effects, with some firms even closing their doors, Law.com reports.

  

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Zucker, Goldberg & Ackerman, after 92 years of practice, will close its doors at the end of next month. According to the New Jersey Law Journal, the firm told 115 employees they had been furloughed. Although it has a healthy volume of business, the firm has over $20 million in debt. According to its bankruptcy attorneys, mortgage-servicer clients refused to pay their bills.

Last year, a foreclosure law firm was evicted.

Morris Schneider Wittstadt, a Georgia firm, has also filed for bankruptcy after discovering a multi-million dollar shortage in its escrow accounts.

Butler & Hosch, a Florida-based firm with 200 attorneys in 11 offices, promptly closed its doors in May. According to Bob Hosch, the CEO of the firm, a drop in foreclosure filings hurt the practice.

Annette M. Rizzo, a retired judge who headed the Philadelphia Residential Mortgage Foreclosure Diversion Program, said, “The explosion of 2008 created a new universe. What was a sleepy docket had become a burgeoning docket.”

The increased volume of foreclosure cases was followed by federal and state regulatory responses, and the effects were felt by law firms that worked with mortgage servicers. Rizzo added, “To do this practice properly under high radar … I just think that some of these firms that can’t adjust or don’t have the right staffing models can’t survive.”

The Consumer Financial Protection Bureau has the power to enforce Dodd-Frank Wall Street Reform and Consumer Protection Act requirements, and it may also create new regulations.

Rizzo said that new requirements of both servicers and lenders have added pressure to rethink the business model. She explained, “They must perform due diligence and answer to a whole new regulatory scheme. That funneled down to firms that have been the mainstay.”

Those knowledgeable in foreclosure law said that these requirements meant more work for law firms, since everyone was being closely watched. Most foreclosure firms charge a flat fee, and sometimes must fight to get their fees from clients. Those thin profit margins have shrunk, and firms must figure out how to change their practices.

A 2012 announcement from Fannie Mae issued new requirements, including that servicers working with their loans must review and approve attorney fees before seeking reimbursement from Fannie Mae. A maximum foreclosure fee was also included, which was meant to cover attorney attendance at foreclosure sales as well as any motions that were filed. The regulation also said that attorney fees “cannot be considered to be earned until all of the steps necessary to complete the foreclosure and vest title in Fannie Mae, including any post-sale confirmation or ratification proceedings, have been completed.”

Last year, Fannie Mae cut its relationship with two major foreclosure firms in Colorado.

Kevin McCarthy, the founding partner of McCarthy & Holthus, said that though his firm “certainly is not experiencing the same types of issues” as other firms, a “barrage” of changes in the law has added challenges to their work. The firm has around 75 attorneys in 8 states, and they focus on “all aspects of default.”

Although McCarthy’s firm is not suffering from nonpayment of client bills, the increased notice requirements, additional insight, and prohibitions to “dual tracking,” which restricts lenders from seeking foreclosure while negotiation loan modifications, have made the job more difficult.

Donald Maurice of Maurice Wutscher defends lenders in consumer suits and posits the issues in a different way: “When you opened your practice, did you contemplate that a federal bureau…would be supervising?” He noted, “Today, that is a reality.”

The CFPB and the increase in Fair Debt Collection Practices Act litigation have changed the way foreclosure litigation is practiced. Maurice remarked, “There has been an explosion of these types of suits. What you’re seeing across the nation … is a consolidation of firms who do foreclosure or even consumer credit collections.”

The Fair Debt Collection Practices Act has also sent malpractice insurance premiums at these firms “through the roof,” Maurice added. He explained, “In no other area of the law are you subject to strict liability. You can be sued for filing a complaint.”

The foreclosure timeline is also longer with the new requirements. Daren Blomquist, the vice president at RealtyTrac, said, “If we just take a look at our data at the average time it takes to foreclose, that has dramatically increased.” According to their data, in the second quarter of 2007, a foreclosure took, on average, 154 days. In the second quarter of 2015, the average foreclosure took 629 days.

Blomquist said this was a major problem with the flat fee model.

State averages vary, however. In New Jersey, last quarter, an average foreclosure took 1,200 days. In South Dakota, in contrast, the average was 177 days.

Read about Zucker Goldberg here.

A paralegal from Zucker Goldberg said the problems started with the New Jersey judiciary froze foreclosures in that state after the “robo-signing” scandal. A firm is not paid until a file is completed, which is more realistic when it takes nine months, as opposed to ten years. The paralegal said that clients “stopped paying, but they expected us to continue to work.”

According to Blomquist, foreclosures take longer in states that have intervened more in foreclosure proceedings. Many states were not prepared for the number of foreclosures they had.

David Dunn of Hogan Lovells said that the added scrutiny on the banks allowed borrowers’ attorneys to “erect roadblocks to effective and efficient foreclosures.”

Dunn thinks that banks understand new rules were created to address specific issues, “but everybody needs to understand that the effect of all this rulemaking is that it will make the process slower and more expensive.”

Blomquist noted that foreclosures were down nationwide, however. In 2010, there were 2.9 million filings, but in 2014, there were 1.1 million, the lowest number since 2006.

Source: Law.com

Photo credit: ILcampaign.org, dailybusinessreview.com (Hosch), mauricewutscher.com (Maurice), hoganlovells.com (Dunn)