Posted on Tuesday, December 29, 2009
As a commercial real estate and foreclosure attorney, author, and occasional commentator on the subject, I must say that Amir Efrati’s observations of apparent tolerance for a vigilante judiciary in the face of our Nation’s massive foreclosure losses (“Foreclosure Challenges Raise Questions About Judicial Role, ” December 24, 2009) spoiled my morning coffee and then some.
Despite our founding fathers best intentions, it’s no secret that the U.S. judicial system is less than perfect. After all, people, namely judges, are the cornerstone of the system and we all know that people are imperfect. Still, amongst the more manageable flaws is our ability to monitor and quash inappropriate subjectivity cloaked as justice. Tolerating deviation and bias by individual rogue judges from the principals upon which our country was founded and with which they themselves agreed to abide when accepting the all-important role as guardian of our nations’ legal system is at best naïve. Especially in a world which revolves around precedence, the potential implications should be abundantly clear.
Not all judges are created equal. And most do not come to the position with first-hand experience in every area of the law upon which they may eventually rule, including real estate law, mortgage financing and foreclosures. Particularly in light of never before seen participations, securitizations, servicing arrangements and other hallmarks of our recent real estate bubble, absent of a thorough understanding of the dynamics and ripple effects decisions relating to these vehicles may have, judges in particular need to stick with the time-tested, universally accepted judiciary scripts.
Second only to judges rendering subjective decisions of the genre Efrati chronicles is the not uncommon practice of judges delaying or avoiding decision-making altogether, in particular on some of the more complicated, larger commercial foreclosures cases we’re seeing today, where losses quickly mount into the hundreds of millions of dollars. The frank reality is that, like the rest of us, judges are not especially fond of being told they are wrong, especially in public. The decision to not decide oftentimes also avoids being overturned. Unfortunately, delayed decisions typically translate to more legal fees and further property equity loss as valuable permits and development entitlements expire, all of which eventually inure to the detriment of the borrower who will be held accountable for the deficiency judgment or arguable, if all else fails, taxpayers and future bank customers.
In fact, the thing about judges making the subjective decisions Efrati noted or delaying decisions is that, as borrowers’ rights advocates clamor about how justice is being served by punishing the banks, the reality is that much of the eventual financial loss will be coming, not from the bank’s coffers, but from our own. With hundreds of banks teetering on the precipice of FDIC takeover, losses from mortgage foreclosure cases are oftentimes what push them over the edge. And we all know where the FDIC money called upon to pull failed banks back up from the dark side comes from. Not to mention the threat of moral hazard compounding damages whereby a judge’s decision to “protect” one defaulted borrower encourages others to default in anticipation of being likewise protected. Lest we forget that at the heart of most foreclosure actions, residential and commercials alike, is a borrower who accepted money from a bank under an agreed set of repayment terms and subsequently has not repaid the money as agreed. Even in the cases cited by Efrati where the mortgage has allegedly not been properly assigned, some bank owns the mortgage and should be receiving payments. Yet the borrower, though still retaining the property, is typically paying no one.
Admittedly the back-end default operations for many lenders, particularly residential default servicers, are still not working well. At first we may have attributed this to simply being inundated with a huge, unprecedented volume of mortgage loan defaults. At this point, servicers have had more than ample time to get their act together and many still have not. The many reasons for this, though not justifications, are fodder for another letter. But, while it is well within a judge’s authority to enforce the rules of court procedure in foreclosure cases, speaking to banking and servicing policies, procedures, and industry transaction structures is not. Although most of my own clients are banks, on the occasion from time to time that I represent a developer or investor I sometimes have the pleasure of contending with that old-fashioned, stereotypical lender’s counsel attitude, which goes something like “I represent the bank and the bank doesn’t have to do anything it doesn’t want to.” Suffice it to say, these folks didn’t get the memo; We’re living with illiquid collateral, virtually every mortgage loan in this country is under collateralized, foreclosure litigation is no longer a zero-sum game! Many banks will win the battle and lose the war in their foreclosure cases. But the point is that, even when judges consider a bank lawyer’s attitude or behavior inappropriate, as may arguably be true if cases are filed overlooking the fact that the plaintiff is not the mortgage holder of record, the more common and appropriate judicial response is to sanction the lawyer, not the client.
At the end of the day even this approach will end up costing tax payers more since many times the so called short cuts taken by banks counsel, particularly in residential foreclosure cases, are the result of the sheer volume of cases they are required to handle at a relatively small fee per case and within very tight timeframes which, if violated, usually result in penalties being assessed against the lawyers by their lender or servicer client. If courts begin sanctioning the lawyers there will no doubt be push back from the lawyers to the banks for higher fees and more time which will, at the end of the day, be paid by borrowers.
Finally, let’s consider the reason lenders are putting so much pressure on their lawyers to foreclosure so quickly, namely our very own bank regulators. As taxpayers, it is in truth our very own officials who are pressuring our banks to foreclose on our homes and commercial properties. Yet even this is not without good cause. The bottom line is that our nation’s foreclosure crisis is not a simple problem. Nor will the solution be simple. But one thing is for sure, any solution that endorses judges vying for the winner’s title in a popularity contest by arbitrarily punishing presumably bad guy banks is a step in the wrong direction.