Legal Help in the Subprime Crisis

As the nation continues to reel from the subprime mortgage crisis, all eyes are on Washington for much-needed relief. But federal responses will only go so far unless Congress addresses one persistent and confounding fact: most low- and moderate-income homeowners facing foreclosure simply can't obtain legal help to defend their homes.

Unlike a citizen charged with a crime, an American facing the loss of his home has no right to an attorney. As a result, the majority of foreclosure cases are uncontested. The lenders are almost always represented by counsel while the homeowners usually are not.

Legal aid programs, which provide free assistance to low-income Americans, report that they are flooded with homeowners seeking help. Units that specialize in foreclosure defense - from South Brooklyn Legal Services in New York to Jacksonville Area Legal Aid in Florida - have had to shut down intake because they could no longer keep up with the demand.

The shortage of lawyers to help families facing foreclosure is just part of a widespread shortage of legal help for families of modest means. Numerous bar association studies have shown that 80 percent of the legal needs of low-income individuals go unmet.

The result is lopsided justice. Because of lack of homeowner representation, lenders are rarely put to the test of meeting the most basic legal requirements for one of the courts' most extraordinary remedies--taking someone's home. As a federal judge in Cleveland recently wrote, the foreclosure process has become a "quasi-monopolistic system where financial institutions have traditionally controlled, and still control ... ."

Judge Christopher A. Boyko's statement was part of a recent ruling in which he ordered banks bringing foreclosure actions to show proof that they own the actual mortgage note. It's a simple requirement to fulfill the basic legal principle of "standing": when a party asks a court for relief, it must show that it is indeed the party who has suffered harm. Asking a court to award possession of the house without demonstrating ownership of the mortgage is like demanding a passport without presenting ID. Yet, this "take our word for it" approach was the pervasive practice used by companies that bought mortgages from the original lenders until a judge delved deeper.

Determining standing is one basic element of this crisis. Many of the defenses to foreclosures are more complicated. Predatory lending schemes often involve complex and deceptive lending practices - such as padding the mortgage with excessive and illegal fees - that homeowners are not in a position to challenge without legal help. And many of the victims are particularly vulnerable; predatory lenders often target elderly or disabled homeowners living on fixed incomes for their schemes.

Without a lawyer, asserting defenses as basic as standing and as complicated as interest-rate misrepresentation is simply not feasible. In contrast, studies have shown that having a lawyer, in general, can increase an individual's chances in a legal case by anywhere from 40 percent to 1380 percent.

To be sure, providing lawyers costs money. But an up-front investment in legal help is well worth it to prevent the spiraling societal costs of foreclosures. Each foreclosure causes communities to lose up to $20,000 in tax revenue, unpaid utility bills, and added costs of policing, maintenance and other services. Additional costs are borne by neighbors, whose property values fall when a nearby home is foreclosed.

Experts are estimating that up to 2 million Americans could lose their homes in the next several years. At the very least, let's give them a fighting chance.

Rebekah Diller is Deputy Director of the Justice Program at the Brennan Center for Justice at NYU School of Law.

Comments

[realitytrumpsbull]

The banks have PLENTY of lawyers to help the people of 'modest means' expedite their departure from the contended property(ies).
And, now that Lawn Force Mint has their armies,
it'll be same-day service! OUT! See ya!

LOL

[StephenBarry]

America may want to step back and assess whether Marx was correct concerning capitalist crises. In seeking truth from facts it appears America has taken the socialist path. Mr. Paulson, US Treasury Secretary, recently stated that his "freeze" plan addressing the global subprime crisis does not abrogate contracts but is necessary to prevent a market failure. However, investor's contracts seem to take precedent - he ignores the contracts between banks and homeowners. He is tranferring wealth from investors to debtors (not counter intuitively in this case) in order to save the investment marketplace. The Fed can then step in to save the lending marketplace with future rate cuts. Yet another macro control crisis - individual corporations targeting poor people with disregard to suitability and 'Know Your Customer' just to make a buck, even if in the aggregrate these actions destabilize the system as a whole. In this state managed economic scenario everyone wins - the poor, corporate investors, lending institutions, investment bank packagers, hedge funds, etc. It seems as a practical matter that socialism has won the day - this day anyway. The only losers in the scenario are responsible homeowners who paid (and still have) higher fixed rates for safety. Punters of the world unite ! It seems global regulators are the weakest link in the capitalist system: they did not see the savings and loan crisis / latin debt crisis / asian contagion / sub prime / insider trading etc etc etc. Then the necessity of Fed / Treasury action. It even took one man - Elliot Spitzer (then New York State Attorney General), on his own initiative, to do the SEC's job for them with insider trading. They need to get thinking economists on board at the regulators or have periodic industry symposiums to assess systemic macro risk. If they already do, it's obviously not working. Look at the consequences - Morgan Stanley is now effectively 10% owned by the Communist Party of China and Singapore, Saudia Arabia and UAE had to bail out some other major players. We're talking systemic insolvency here and a macro transfer of financial / economic and political clout. A capitalist crisis indeed.

[realitytrumpsbull]

Yep, and they've got the body-armored, hitler-hatted shock troops at the ready, standing by to help people 'move'...

[NABNYC]

I have represented people in foreclosures, and tenants in unlawful detainers, and the basic problem for both is that they have no defense to the eviction/foreclosure.

If someone borrows money to buy a home, and puts up the home as collateral to secure repayment of the obligation, then they default, the lender can take the home. Often without even the need of instituting legal proceedings.

The fact is that most homes in foreclosure are for people who cannot make payments on their loans. Fighting against the foreclosure will not help them do anything except hold off the lender for a few months. But in the long run, they generally will lose because the loan documents are clear: either pay on time or we'll take back the house.

The real problems in the current situation arise from people borrowing more money than they could afford and buying a home they could not afford. The loans were interest-only for some period, but once the real payments kicked in, people can't pay.

And they have no equity in the home. They don't own anything. They owe $500,000 on a home worth $500,000 or less. Best thing for them to do is to move out, negotiate with the lender to give them a deed in lieu of foreclosure, go rent for awhile and wait for the market to drop.

[oldpotsmuggler]

Your suggestion beats almost anything else I've heard as a proposal to help with the foreclosure mess but low income people armed with lawyers is a thought that will scare some pretty powerful players. Getting Legal Services funded every year is a challenge and it's pretty much available only to people too poor to even own a house. Lawyers for regular folks is a stretch that is probably too raidcal for these times.

For large scale truly predatory lenders it seems like there should be some pretty good class action material available. Most of the people losing their homes did not really get cheated by anything other than bad luck and circumstances but places like Beneficial, Household, and Associates seem like they might be ripe for a closer look. So far, though, I haven't heard of anyone that has found a big enough pattern to get anything off of the ground.

[Henry]

Many mistakes are made by rookie broker/lenders in a hurry to cash in on fees at closing and premiums at sale of note to upstream securitizations.
Truth in Lending and RESPA (real estate settlement procedures act) are notoriously failed by quicksters and present easy-pickins for attorneys with numeracy. A unique subset. Devils in the details works both ways.