Saturday, October 18, 2008

So Much For Lawyer Jokes


In past posts, I have tried to explain the mortgage side of the current economic crisis, and how it occurred. For individuals, as opposed to the larger investment world, much of the blame should be placed on 1. borrowers who wanted cash and didn't care how much it cost, 2. the predatory lenders who lied and misled money-hungry borrowers, 3. the new financial structure called Mortgage Backed Securities ("MBS"), where no lender had any risk if the loan failed - if the borrower did not pay ( no one cared if the borrower cold pay 2 years later!), and 4. the lawyers who did the closings .

Now, being an attorney and working as one, I have two sides of this issue to tell. First, many of the closings which occurred, were set by Internet-based mortgage brokers/lenders, or by direct mail and telephone marketers. In most states, no attorney was NEEDED to perform a closing. There were thousands of "witness only closings" where a notary or similar official, witnessed the borrower(s) sign the loan documents, "acknowledged" (witnessed) the signatures. That's it!! No explanation of what anything meant, no chance for a borrower on a refinance to find out what the "Notice of Right to Cancel" meant and how it should be used; just a witness to the signing.

A typical mortgage company closing package consists of 70 pages of documents for a single loan. Virtually no borrower, who has not had several closings before, can even fathom what all of the documents mean. Specifically, few, if any, borrowers read and understood the Adjustable Rate Notes (the I.O.U.s), especially where there was a discussion of rates being set to an "Index" of the "LIBOR" and a "Margin" which was added to the "Index". Worse were the very misleading terms like "Simple Interest Mortgage" which described the interest calculation but was anything but simple to comprehend.

The other documents were equally difficult: Truth-In-Lending (TIL) disclosure which could be more misleading than what the broker/originator/lender said; the Notice Of Right to Cancel; the Good Faith Estimate; the Mortgage itself, which is a very detailed document, that gave the right to foreclose following the law, but without judicial review in many states (Massachusetts being one of them); and the HUD-1 Settlement Statement, which shows all of the numbers/costs/fees; and on and on. If they are so difficult, who was there for the Borrower to explain? Certainly not a notary or other "witness only".

In most states, Massachusetts included, the attorney acting as the Settlement Agent, actually represents the LENDER, not the Borrower, even though the Borrower pays the cost! In my practice, I tell Borrowers that the law states that I represent the Lender, but that I will consider myself representing the Borrower as well, if the Borrower so desires, and that in the case of a conflict, I will stop the closing, contact the lender, and have the Borrower and Lender work out the problem, with me acting as the go-between. In reality, taking the position I do, I keep the Lender safe from a suit for bad practices, and keep the Borrower safe from a Predatory Lender. Seldom is this matter really explained to Borrowers.

By far the biggest shortfall in the process, is that Attorneys DO NOT explain all of the documents to the Borrower. I have heard attorneys tell a Borrower, "This is the mortgage - it means that your house is collateral for the loan and if you don't pay your mortgage, the bank will take your house -Sign here and here and here". The attorney's assertion was basically correct, but then why are there 15 pages? ATTORNEYS ARE NOT DOING THEIR JOB IF THEY DO NOT EXPLAIN EACH PARAGRAPH OF THE KEY DOCUMENTS!!! I believe that it is fair to say that many Borrowers relied on the closing attorney to warn the Borrower of problems, and to explain exactly what the terms of the loan were. Many attorneys did not, and still do not, understand the various types of mortgage loans, and therefore cannot explain the myriad of products that hit the market within the past 4 years.

In closing, there is plenty of blame for all - attorneys however should have been more vigilant; lenders should have been less greedy; and borrowers should have said "Please explain this stuff to me - I do not really understand", but the money killed the curiosity (which killed the cat I guess).

author's copyright by Richard I. Isacoff, Esq. October 2008

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