legal services

by Harvard Law Development on March 10, 2016

When the “Distressed Assets” are Homes: Fighting Foreclosures on FHA Loans in Philadelphia

By Rachel Labush*

I am a staff attorney at Community Legal Services of Philadelphia where I defend low income homeowners in foreclosure. By saving my client’s homes through loan modifications, I am holding the mortgage companies to the contracts that they have signed and the laws that govern their conduct.

Federal Housing Administration (FHA) loans help provide safe, affordable access to homeownership for low- to moderate-income and minority borrowers, as well as first time homebuyers. The system is meant to benefit both parties: The lender is insured against the risk of default by the FHA insurance, which borrowers pay for through premiums. FHA loans also protect borrowers; before the lender can foreclose and make a claim on the insurance, they are required by federal regulation and U.S. Department of Housing and Urban Development (HUD) guidance to review the homeowner for loan modifications and other “loss mitigation” options including forbearance and repayment plans. Under the Distressed Asset Sales Program (DASP), a mortgage company may assign FHA loans to HUD and cash in on the FHA insurance before completing a foreclosure. After taking assignment of the mortgage, HUD strips it of its FHA insurance and protections and auctions it off to private investors.

Before foreclosure, or the use of DASP, the mortgage company is supposed to certify that the homeowner does not qualify for any modification. Over and over I see homeowners in foreclosure, with loans stripped of protection, who qualify for loan modifications, but who were not properly reviewed, or who fell behind on payments but qualified for a forbearance or repayment plan. Lenders who fail to follow through with their legal obligations deny borrowers their legal right to a modification, and in the same fell swoop remove the loan protections central to the FHA loan program.

It’s not just my clients who are falling through the cracks of HUD’s failure to conduct meaningful quality control of FHA servicers. Over 400 properties in Philadelphia have gone through DASP. None of these homeowners received advance notice that their loan was being stripped of the FHA insurance that they had paid for, and many were in the middle of applying for FHA loss mitigation that they were entitled to under federal law. Each one I spoke to was shocked that it was even possible to take away their FHA insurance and protections. To date, HUD has sold over 101,000 formerly FHA-insured loans through DASP.

As DASP exists now, HUD is rewarding bad servicing with insurance payouts while facilitating the dumping of these borrowers’ loans onto rapacious investors, with no advance notice. Because of the broken loss mitigation review by the FHA servicers, loans are going through DASP despite the borrowers’ eligibility for loan modifications. The abusive practices of these DASP loan buyers have caught the attention of members of Congress and the mainstream media. Here in Philadelphia, we have seen the new investors deny people loan modifications without explanation, require huge down payments to even be considered for a modification, demand twelve months of trial payments before any modification can be made, and refuse to reduce or defer any part of the debt, even though they are buying the loans at a steep discount from HUD. When they do offer loan modifications, the terms are inferior to FHA loan modifications.

I am still litigating the first wave of DASP foreclosures to come through my office, and all of my DASP clients are still in their homes. But most FHA borrowers do not have lawyers, and they shouldn’t need them to get the loan modifications they qualify for under FHA guidelines.

I agree with the recommendations of a broad range of civil rights, consumer, housing, and legal services organizations.[1] HUD should require servicers to provide notice to borrowers prior to including a loan in a DASP sale, and an opportunity to challenge it. There should also be a mechanism for borrowers to provide feedback to HUD on post-DASP servicing. HUD should collect and make available more detailed data on post-DASP outcomes and bar abusive investors from future auctions. To ameliorate the impact on homeowners and communities, HUD should increase the participation of non-profits in DASP by making smaller, more geographically based pools. Philadelphia City Council endorsed this last goal, unanimously passing Resolution 160106 on February 11^th.[2] But the most important change would be holding FHA servicers to their contractual and legal obligations to offer loss mitigation to qualifying borrowers.

To each of my clients, their home is of the utmost importance, and its loss would be devastating. FHA servicers must improve their loss mitigation, and should be penalized by HUD for their widespread failure to evaluate borrowers for help before filing foreclosure. The effective use of loss mitigation by servicers also saves money for the insurance fund by reducing claims on it. Getting it right the first time – before a foreclosure, before a claim on the insurance fund, before a DASP sale – would be a better outcome for HUD, the taxpayers, and local governments. But most importantly to me, it would greatly help my clients and the thousands of low income homeowners like them who are fighting to save their homes.

* Rachel Labush is a staff attorney at Community Legal Services of Philadelphia , where her practice focuses on defending low income homeowners in foreclosure, fraud, and mortgage servicing abuse cases. She earned her J.D. cum laude from Harvard Law School, where she was a member of the student-run Harvard Legal Aid Bureau.

[1] See consensus recommendations at https://cdn.americanprogress.org/wp-content/uploads/sites/20/2015/02/DASP-Consensus-Recommendations.pdf

[2] See https://clsphila.org/news/philadelphia-city-council-passes-resolution-preserve-homeownership

Image by respres – http://www.flickr.com/photos/respres/2539334956/, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=6694382

by Harvard Law Development on March 27, 2015 Leave a Comment

What’s access to justice for? Let’s get more philosophical. In a hurry. Part II

By D. James Greiner

In the previous post, I talked about how, if the goal of a legal aid organization’s debt collection litigation defense program is to prevent defendants from having to pay debts sued upon, then there might be a far cheaper way to go about fulfilling that goal, namely, by buying debts on the open market and forgiving them. And I concluded the last post by saying that buying and forgiving debts feels wrong somehow.

Or maybe not wrong. Incomplete.

And I think it is incomplete. But why? It has to be because we think that in providing legal services to debt collection defendants, we’re doing something more than trying to kill a particular, alleged debt. But what is that something more? Remember, I want to measure things to see if they “work,” so I have to know what to measure.

Maybe, by defending against individual debt collection lawsuits, we’re trying to change how the court system handles debt collection cases. OK, fine. But if that’s what we’re trying to do, we have to ask, “Does the strategy of representing individual defendants in debt collection cases have any real hope of success?” Can legal aid lawyers represent enough debt collection defendants to put a dent in the way courts handle these cases? Maybe, maybe not. Perhaps more to the point: if the idea here is to change the way courts handle debt collection cases, then the very first problem legal aid ought to tackle is not what happens to defendants who do show up to contest collection lawsuits, but rather the fact that (in some court systems) 90% of defendants don’t show up at all. There’s little a litigator can do in an adversarial system when potential clients don’t agree to be represented and don’t show up to court. Unless we fundamentally restructure the adversarial system (quite a job), the court will do what it has to do when a defendant doesn’t show, i.e., enter judgment for the plaintiff. So if changing the system is the goal, then getting folks to court might be be the first focus of a legal aid debt collection program.

Getting folks to court could mean letter writing campaigns. It might mean learning from junk mailing companies (who else studies how to induce people to open envelopes?). It might mean enlisting psychologists to tell us how to get people to take action. But wait, we might think. That’s not law. You don’t need law school for that.

And it isn’t law.

But it might be what’s needed to change the way courts handle debt collection cases, which was the point. Meanwhile, it’s easy to think of ways to measure whether efforts to get defendants to contest debt collection cases are succeeding.

Also, if what we’re attempting to do is to change the way the court system handles debt collection defense, does it matter which potential clients we represent, when we’ll never have enough resources to represent them all? If changing the court system is the goal, aren’t potential clients fungible?

So, do we need to spend money on intake and screening procedures in this area?

Maybe the point of providing debt collection litigation defense is to make clients feel better. Perhaps we think that represented litigants feel better than unrepresented litigants. That might be true, or it might not be. We can certainly measure it with satisfaction surveys. But before we do, we might ask, why do we care how litigants feel? I don’t mean to sound callous, because I actually do care how litigants feel.

But why?

There are at least two reasons for why we care about how people feel about the legal system: (1) their happiness matters and (2) if too many people lose faith in the legal system, they’ll start solving disputes with guns instead of lawsuits.

Fine.

But if the first one (increasing happiness) is what we’re after, is litigation defense the best way, or even a good way, to increase people’s happiness? Maybe it is, maybe it isn’t, but we should find out. That means more surveys, but surveys that focus on happiness levels. And if the second one (faith in the legal system) is what we’re after, we need satisfaction surveys that are unlike anything I’ve ever seen in regular use before.

Maybe the point of debt collection litigation defense is to affirm the dignity of each individual, or to remind the court system (and thus the government) that behind each docket number is a human being worthy of respect. I actually believe that, too.

But if what we’re after is affirming dignity and educating judges, again, does it matter which potential clients we represent, when we can’t represent them all? Even more fundamentally, should we care about whether legal aid makes defendants more likely to win cases? Or, for that matter, whether represented defendants win any cases at all? I don’t think so, because if what we care about is affirming dignity and educating people in power, then those purposes are served by the representation itself, and the adjudicatory output of the cases doesn’t matter. So, if these are the primary goals, we shouldn’t bother examining court files, or randomizing, or anything like that.

I don’t want to be Mr. Ollivander’s tape measure. I want to measure something more useful than the length of the space between people’s nostrils. So I have to get philosophical before I get statistical.

And so today’s message from your friendly neighborhood statistician is: let’s get more philosophical. In a hurry.

by Harvard Law Development on March 23, 2015

What’s access to justice for? Let’s get more philosophical. In a hurry.

By D. James Greiner

“Harry suddenly realized that the tape measure, which was measuring between his nostrils, was doing this on its own. Mr. Ollivander was flitting around the shelves, taking down boxes. ‘That will do,’ he said, and the tape measure crumpled into a heap on the floor.” —Harry Potter and the Sorcerer’s Stone

I’m a statistician. My job is to measure things. But I don’t want to be like Mr. Ollivander’s tape measure. I don’t want to end up crumpled into a heap on the floor. I want the things I measure to be useful. Even more, I want the measurements I make to be used, which is a lot harder.

What does that mean?

It means that every time I think about measuring some thing, particularly if I’m trying to find out whether that thing “works,” the first thing I have to do is to ask, “What is this thing for?”. Without deciding first what the purpose of a thing is, there’s no way to know what I should measure to see if that thing is working.

Take legal services to low-income folks. Some lawyers and law students feel a strong desire to provide legal services to the poor. I’m all for it. But unless the only reason we’re providing the services is to make ourselves feel better, we ought to care about whether we’re accomplishing anything by providing the services. And we ought to care about whether there might be a better or more efficient way to accomplish whatever it is that we’re trying to do. That might mean less money for lawyers. But unless the point of legal services to the poor is full(er) employment for lawyers, that shouldn’t bother us too much.

Here’s an example: a few legal services providers have recently begun to provide services for defendants in small claims court debt collection cases. Incidentally, my guess is that this is a great idea. My speculation is that legal services providers have focused for too long on the “iron triangle” of government benefits, eviction defense, and family law.

So, great. A focus on debt collection defendants. Super. Now, I want to measure whether debt collection litigation defense works. So how do I do that?

I first have to ask what debt collection defense is for.

Suppose I decide: debt collection litigation defense is about preventing the defendant from having to pay the debt. After all, a dismissal of the lawsuit with prejudice is the best possible legal outcome that a litigator can achieve through litigation defense of a debt collection defendant. OK, great, I can measure that. I can randomize a group of debt collection defendants to either an offer of representation or to no assistance, look at court records, and compare judgments in the offer-of-representation to the no-offer group. Super! Off I go to measure (as soon as I can find a legal aid office to do the study with me).

Wait a minute.

If the purpose of providing litigation defense to debt collection defendants is to keep the defendant from having to pay the debt, there’s a far, far, far cheaper way to do that: Just buy the debt the plaintiff is suing on. Buy the debt on the open market, and then forgive it by telling the alleged debtor that she’ll never have to pay. You can probably do that for, say, five cents on the dollar. So you can buy (and then forgive) a $2,000 debt for $100. Is that more efficient than litigation defense? It almost has to be. When you think about what a litigator needs to function (computer, printer, IT support, office, transportation, salary, benefits, administrative support, etc.), it’s hard to think of how one can produce a functioning litigator for less than (this is a blind guess) $60,000 per year. And how many $2,000 debt collection cases can that lawyer realistically defend in a year? 300? 400? For $60,000, a legal aid office could buy and forgive 600 $2,000 debts. So, the best thing to do for the legal aid office is not to hire a lawyer; rather, the best thing to do is to buy debts on the open market and forgive them. You get twice the bang for the buck.

The part about just buying debts feels wrong somehow. More to come in the next post.