Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Yesterday we followed the tale of woe offered, by their class-action consumer-protection lawyer Gary Klein, of Lori and Mark Pestana of Westford, MA, who as reported in the Boston Globe are now suing Washington Mutual (WaMu) to prevent the foreclosure of their modest home in Westford, based on their assertion that a lender has a duty to negotiate with them over a repayment or restructuring plan for their fixed-interest-rate mortgage.

 

“Uh, Goliath, I’m gonna change the rules here”

 

The Pestanas tell a good David-and-Goliath story of bad advice (given telephonically and apparently without contemporaneous records), of unresponsive loan servicers, of heartless lawyers.  (WaMu’s foreclosing litigators, the Boston law firm Harmon Law, do themselves no public-relations favors by having a Web site that lists no human beings as actually employed by the law firm.)

 

All this begs a question not raised in the Globe’s article:

 

4.  Even assuming arguendo that the Pestanas’ facts are true, are they entitled to relief?  As usual, when one slows down a complaint, the questions are a little more dicey.  Let me frame it as I deduce the Pestanas want it to be seen:

 

“We were current on our mortgage, and we could have kept making the payments.  But we were told that we could get a break, and we acted on the advice of WaMu’s legally authorized representative.  As a result of that detrimental reliance, we incurred penalties and surcharges we wouldn’t have had to, and now we can’t get back to covering our loan.  Our default is your fault.”

 

In blue I’ve highlighted the five elements in the logic chain.  The Pestanas, to gain my sympathy if not judicial relief, need to show that the hole they are in is not their doing but WaMu’s – or, if not WaMu the bank, then WaMu’s duly authorized agents, the loan servicers.

 

The role of servicing firms in the rising tide of US foreclosures is a growing political issue as lawmakers realize the firms - and investors who purchased the mortgages in bundles - are logjams to resolving individual homeowners’ situations and clearing up the housing crisis. WaMu is a lender as well as a servicing company.

 

US Representative Barney Frank, the Newton Democrat who is chairman of the House Financial Services Committee, recently asked servicers to explain their poor handling of loan modifications for borrowers trying to keep their homes.

 

Frank plans to send a letter today [August 5, 2008 – Ed.] asking servicing firms to delay all foreclosures until Oct. 1, when a new federal program takes effect to help homeowners refinance their mortgages.

 

New legislation coming through

 

Such an approach shouldn’t be mandatory, it’s entirely sensible, and may be helpful.  As I posted a year ago in Blockages to resolution, a loan servicer usually operates under an agreement that limits the servicer’s flexibility in restructuring loans except as permitted by the investing lender or ultimate securities holder.  Certainly, if I were a servicer, I’d want permission to wait for the new Federal resources to become effective.

 

That program will provide Federal Housing Administration guarantees to lenders willing to make up to $300 billion available to refinance struggling borrowers. Frank scheduled a Sept. 17 hearing to examine whether lenders have complied with his request for a delay.

 

Using the bully pulpit – what Mr. Frank can do, and should do.

 

Time for you lenders to explain yourselves!

 

In their lawsuit, the Pestanas are seeking damages for their tarnished credit and are trying to reverse their eviction and foreclosure. Their Boston lawyer, Gary Klein, said their eviction has been delayed until late August.

 

Any good lawyer knows that suing simply on defense – to stop someone from doing something – is unbalanced, you have to sue for money on some basis, if only to balance the scales.  Hence the conjured claim of damaged credit which, as I’ve noted, relies on the supposition that the Pestanas could have kept paying the loan but didn’t because WaMu told them to.

 

Because WaMu told me not to

 

On its Web site, the law firm says it specializes in these matters:

 

Roddy Klein & Ryan specializes in the representation of consumers in individual and class actions against predatory lenders, finance companies, debt collectors, utilities, and others.  Since it was founded, Roddy Klein & Ryan (formerly Grant & Roddy) has obtained several hundred million dollars in restitution and debt forgiveness for consumers by successfully asserting claims under state and federal consumer protection laws on their behalf. A partial listing of the firm’s litigated cases includes the following:

 

At this point, I started wondering: How did the Globe get this story?

 

WaMu and Harmon Law violated state law requiring them to bargain in good faith, Klein alleged.

 

Any lawyer pondering litigation against a large institution wants the best David-and-Goliath story he can find, so we can presume that the Pestanas were chosen, from among the potential plaintiffs, for the sympathy value of their tale.  Is there any legal basis behind their claim?  I wonder: the phrase ‘bargain in good faith’ comes from labor law, and presupposes there are two parties who have equal independence of standing.  The Pestanas don’t – they signed a note, they owe the money.  Perhaps the Globe’s journalist was told that WaMu had a duty to negotiate in good faith, which is closer to this situation, but still not right, because it’s not obvious that WaMu was under any duty to negotiate at all.  That’s what notes and mortgages are about: you owe the money, pay it. 

 

“Pay the mortgage?  I hit you with my class-action lawsuit!”

 

A quick Google reveals no obvious duties to negotiate.  Massachusetts law, like Federal law, prevents deceptive or abusive debt collection practices, and prohibits loans with usurious interest rates.  Neither applies here.

 

If the Klein law firm gave this story to the Globe – and how else would the paper have got it? – then Klein sees benefit in telling the tale of woe – sympathetic press that makes WaMu out the bad guy and the Pestanas an innocent victim of advice they say they received from an unnamed person over the telephone.

 

That’s us, innocent victims

 

Still, perhaps there are facts not in the Globe story.  Perhaps the Pestanas could pay their original loan if only the penalty interest, late charges, and foreclosure-related charges were waived.  Most loans have substantial increases in charges immediately upon default; lenders do this to discourage defaults and encourage people to exit from default as quickly as possible, and to give the lender something to waive in any settlement discussions.  It is entirely plausible that the Pestanas, having fallen behind on a mortgage they were barely able to pay, are now far enough behind the 8-ball as to be incapable of restoring themselves.

 

Should WaMu settle?  David-and-Goliath litigation is asymmetric in two ways:

 

Goliath has several advantages: (1) it has experience and procedures, whereas David is facing everything for the first time, (2) it’s used to litigation and can treat it dispassionately, whereas litigation scares most normal people, and the want to exit it as quickly as possible, and (3) to the litigator, it’s only money.

 

How big is your legal budget?

 

David likewise has some advantages: (1) it automatically gains the sympathy vote, which matters both in the court of public opinion and in an actual state court, where judges are usually inclined to give the smaller party the benefit of any doubt, (2) it can tarnish Goliath’s reputation, which is a weapon of variable potency depending on how badly Goliath cares about its good name, (3) if the amount in dispute is small compared with the costs of litigating to a resolution, Goliath may be willing to settle on a purely utilitarian calculation.

 

“Maybe I should have considered settling …”

 

WaMu undoubtedly cares somewhat about its good name, but the bank’s been battered about the head and shoulders – it’s rumored to be a takeover candidate, and its survival as an independent is in jeopardy.  Also, this cannot possibly be the only such litigation WaMu will face – there are precedential considerations.

 

[Massachusetts is an unusually good forum for consumers to litigate; we have a state statute, Chapter 93A, that is potent both as to causes of action – fraud on the consumer is defined fairly broadly – and in remedies – treble damages plus attorneys’ fees, ouch!  That’s likely to be a consideration for WaMu right up there with Alabama juries.]

 

The litigation moves the Pestanas, and presumably the others in their class claim, from the ordinary into the slight-nuisance category.  There’s slightly more reason to settle with them after the Globe story than there was before. 

 

Signed posted outside WaMu’s offices?

 

If I were advising WaMu, I’d encourage a settlement out of realpolitik – partly to deflect the publicity, partly to pick off a lead plaintiff if I could, partly to reduce the risk of an expanding class-action lawsuit.  If their story and their legal claim are true – which is entirely possible – then in equity they should be allowed to go back in time to their October, 2007 mistake – or to be put today in the same economic situation as if they had been making payments continuously.  Thus I’d waive the late fees and allow the Pestanas to restore their original payment schedule – I see no reason to give them a break beyond what they signed up for, since even if their story is indubitably true, they’re claiming at best that they wouldn’t have defaulted, so we give them the benefit of their claim.

 

 

My advice would be predicated on the Pestanas’ demonstrating that they really could make payments restored at the original level, and that they did do the things they say they did.  I’m being true to the two questions I asked in a post a year ago, before the Pestanas defaulted:

 

Why are you in trouble?  Whatever explanation you give, it had better be the truth.

 

What’s the best way forward?  Your goal is to demonstrate that foreclosure, although administratively reliable, is a very risky financial path, whereas modifying with you, however it may sting, is reliable.

 

Everything I say is true

 

 

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