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3 Simple Rules to Avoid Being Trampled by Foreclosure Litigation

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Commentary by Richard Charnley

RISMEDIA, August 6, 2008-For the last year, news of mortgage foreclosures have infiltrated our lives. Banks are failing, legislatures are planning foreclosure relief and Realtors are inviting buyers to take “all expenses paid” tours of distressed properties. Billions of dollars are at risk.

While lawmakers structure “bailouts” and developers sell excess inventory at deep discounts, the foreclosure numbers continue to escalate. As more and more families lose their homes, history has taught us that the very threat of litigation will expand geometrically and eventually become an elephant in the living room.

For most brokers, agents and lenders, dealing with the elephant is a matter of when, not if. To avoid becoming another deep pocket casualty of the projected litigation stampede, brokers and agents can follow three simple rules that will deflect criticism and keep the elephant at bay.

1. Collect Defensive Documentation Now

As investment banks and brokerage companies suffer, it is important to have critical documents on file and accessible because once you find yourself in the cross-hairs of mortgage loss litigation, you will need to disprove liability. The best way to marshal defensive evidence is through the proof of your own documents.

Collect and safely store your recent mortgage documentation now, organizing materials by transaction. Although this instruction seems rather elementary, it is amazing how many times documents concerning a single transaction are filed in several different places, increasing the likelihood that you will not be able to find a particular document easily. In addition, pertinent information should be summarized so that details related to each transaction, such as contact information for all players involved in the loan, can be easily accessed and monitored.

If documents are unorganized and hard to access, it will potentially expand the scope of discovery in litigation. Lawsuit discovery requests typically seek all “writings,” such as handwriting, typewriting, printing, photographs, e-mail and “any form of electronically stored documents.” Responding to the discovery request can be difficult if your transaction files do not include all of the documents. This can invite a costly discovery battle, where your record keeping practices will be scrutinized and not bode well for your side of the case.

If any of your transactions are involved in a current lawsuit, pull together all of your documents so that they can be on hand immediately, even if there is no pending request for this evidence. Having the documents available will also help your lawyers analyze potential strengths and weaknesses of the case as well as prepare and develop case strategy.

2. Monitor Public Notices

If the organizing and centralizing of files reveals problematic loan packages, team members or offices, start closely monitoring public notices and publication dates. This is where you will see the greatest return for the time invested.

There are multiple ways to monitor the public foreclosure information filed with the local county government. This office has various names depending on the county, such as the recorder, clerk, prothonotary or bureau of conveniences. In certain counties, public records are posted online. Other counties employ the services of a foreclosure listing service company for a fee, where they provide you all of the relevant public notices. The public notices can then easily be monitored for localized areas on a daily basis from a remote computer.

By monitoring the public notices, you will be able to identify files that require further attention or possibly an intervention. Early identification of potential problem files will assist both the company and its counsel in structuring relevant defenses to maximize future litigation strategy.

3. Evaluate Performance of Associates

The mortgage process involves multiple players-brokers, appraisers, lenders, borrowers and real estate finance companies. Often, brokers package multiple deals using the same “team,” and as a result, cross referrals of shady deals can be commonplace. Start reviewing associates’ past mortgage deals that are in default, or worse, in actual foreclosure. If you have a repeat offender, action should be taken immediately.

If action is necessary, you should immediately engage in reverse engineering and scrutinize not only all of the deals closed by such a broker, but also any deals involving a member of the broker’s team. If this goes unaddressed prior to litigation, who will be left holding the bag? The employer, of course.

Brokers, agents, underwriters, appraisers, securitizers and lenders will become the targets of mortgage foreclosure litigation. Even if you have a positive reputation, you should presume that you will be sued if you or your associates have faulty transactions. Other assumptions invite financial disaster.

The only reliable method of maintaining financial security during this storm is to build a strong safeguard by following the three simple rules, so when the elephant’s trunk starts fumbling for the keys to your clients’ houses, your liability is minimized.

Richard Charnley is a partner at law firm Ropers, Majeski, Kohn & Bentley in Los Angeles and is a member of the Mortgage Foreclosure Litigation Task Force. The following partners based in the San Francisco Bay Area contributed to this article: Stephen Lightfoot II, Jesshill Love and Todd Wenzel.

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