Low bar: How lawyers profit off desperate homeowners

Introduction

In 2012, after a heart attack left him too ill to work and unable to make his mortgage payments on time, John M. Green turned to the Litvin Law Firm for help.

Green said he paid the firm some $8,000 over the next two years to negotiate better terms with the lender on his house in Baker, Louisiana. But he lost the home anyway, he says, because the Brooklyn, New York, law firm did little beyond taking his money.

“My experience was horrible,” said Green, 72, who is back at work part-time as a school teacher. “They didn’t follow through with anything they said they were going to do.”

It’s not just former Litvin clients like Green who are aggrieved. The attorneys general of New York and Maryland have accused the firm of preying on distressed homeowners by failing to deliver the legal firepower it promised.

People deeply in arrears on their mortgages wasted money they could ill afford to lose, while dozens lost their homes, Maryland officials charged. The case, filed in 2014, targets the firm and its founder, attorney Gennady Litvin. Both state proceedings are pending.

Litvin would not comment.

Since 2010, tens of thousands of strapped homeowners have alleged they were cheated by lawyers or marketers boasting ties to law firms, whom they trusted to renegotiate mortgage loans or stave off foreclosure actions, a Center for Public Integrity investigation found.

Since 2010, a coalition of consumer and law enforcement groups organized by the Lawyers’ Committee for Civil Rights Under Law has tracked companies and law firms that promise to “rescue” homeowners from foreclosure and mostly fail to deliver. The group has collected more than 46,000 written complaints from homeowners whose losses totaled more than $100 million — nearly two-thirds linked to apparent misconduct by lawyers or their associates.

Minorities accounted for just over half the complaints, and they tended to lose more money than whites. Hispanics lost the most, more than $4,200 on average.

“They take $3,000 from someone who only has that much, not from a population with a lot of wealth,” said Michael Tanglis, of the Lawyers’ Committee for Civil Rights Under Law. Tanglis analyzed the complaint data at the request of the Center for Public Integrity.

Many victims haven’t recovered much, if any, of their money. The Federal Trade Commission, which has the duty to protect consumers, and the federal Consumer Financial Protection Bureau, which oversees lenders and financial companies, have won more than $341 million in civil judgments against foreclosure rescue outlets including law firms since 2009. But the agencies have actually collected less than 5 percent of that amount, court records show.

The sheer number of attorneys who have engaged in dubious foreclosure enterprises — the Center’s research identified more than 1,000 nationwide — also has vexed state bar associations and courts that both license lawyers and run funds to compensate their victims. Bar groups say the schemes are clearly illegal, yet attorneys who help orchestrate them mostly escape serious discipline, while victims often aren’t compensated, the Center found.

Brooklyn attorney Litvin and his firm, for instance, both filed for bankruptcy protection last year to get out from under debts. They listed more than 4,800 potential creditors — many ex-clients.

Carlos Gardea, a driving instructor who lives in El Paso, Texas, is on the list. When he agreed in 2012 to pay a $1,700 upfront fee and $595 a month to cut his mortgage payment, he considered it a good deal. A paralegal emailed him requesting documents, but each time he phoned the firm asking about progress on his case, all he got was a brush-off, he said in a court filing.

Gardea told the Center he eventually saved his home from foreclosure with the help of a local attorney. He feels the Litvin firm deceived him.

“I just hope to see some kind of money in my mailbox one of these days,” Gardea said. “I did pay a lot. It is pretty unfair.”

Meanwhile, new scams on foreclosure rescue are playing out in some communities, particularly ones with hot real-estate markets. Vulnerable homeowners, often minorities and immigrants, say they have been tricked into signing over their property deeds to scammers who used illegal or unethical pressure tactics to gain their trust.

Having a lawyer at the table in these deals adds “a veneer of authenticity,” said Jenny Eisenberg, a Brooklyn, New York, legal-aid attorney.

False Fix

More than $7 trillion in wealth vanished when the nation’s housing bubble burst nearly a decade ago, devastating many working-class homeowners. In 2008, more than 3 million homes were foreclosed on nationwide as real estate prices tanked and millions of people lost their jobs.

A year later, federal officials rolled out the Home Affordable Modification Program, or HAMP, hoping to keep millions of others from being forced from their homes. The voluntary program called on lenders to cut mortgage interest rates or loan balances through a negotiation process called “loan modification.”

How much HAMP has helped overextended homeowners is debatable. Of the 5.7 million households that applied for loan modifications between December 2009 and April 2015, nearly three-quarters were turned down, according to the report of a special inspector general reviewing the program.

Andrew G. Pizor, an attorney with the National Consumer Law Center, which advocates for low-income and disadvantaged people, said mortgage servicers have done a “horrible job,” often losing paperwork or slow-walking loan modifications.

“People were strung along for months, then told to start from scratch,” Pizor said.

The high rate of HAMP rejections played into the hands of entrepreneurs willing to falsely guarantee they could cut through red tape and renegotiate mortgage loans. And as homeowners grew more desperate to keep a roof over their heads, many were easy prey — and some still are.

Court records show that telemarketers, often denizens of boiler-room alleys in California or Florida, so named for their high-pressure sales tactics, have relied on direct mail, websites, and radio and television ads to pitch broadly worded foreclosure protection services by attorneys. Many charged homeowners a monthly fee of up to $700.

In one ad entered into evidence as part of an FTC lawsuit against the Danielson Law Group, a male announcer intones: “Attention homeowners. The government has increased pressure on lenders to prevent foreclosures. If you’re one of the millions behind on their payments, struggling to stay afloat and in danger of losing your home, call … for your free professional consultation.”

Some marketers have advised homeowners to quit making monthly mortgage payments while they worked on renegotiating their loans, which is bad legal advice, authorities said.

Others have persuaded property owners that their mortgage debt would be forgiven because of past misdeeds by their lenders, an unlikely scenario.

In another enforcement action, the FTC cited an advertisement hawking attorney services with the headline, all in capital letters: “DON’T LOSE YOUR HOME.”

“Attorneys have been successful in proving fraud and predatory lending practices which has caused some borrowers’ mortgage to be dismissed in court,” reads the ad. “Most of the mortgages done over the last decade have some kind of violation and only an expert can reveal the proverbial needle in the haystack.”

Some have strongly implied or falsely claimed to be affiliated with the U.S. government, court cases show. Others mailed homeowners official looking “Loan Modification” notices. “Based on your mortgage lender information and your property profile provided to us you may be qualified for loan modification,” reads one. The notice warns: YOU MAY FORFEIT LEGAL RIGHTS IF YOU DO NOT TAKE PROMPT ACTION. WE CAN HELP SAVE YOUR HOME.”

There’s no way to know how many people who paid these firms might have been able to secure a home loan modification by negotiating directly with their lenders. It’s also likely that some people who answered one of these ads had not made mortgage payments for months or were so deeply underwater financially that they had little hope of keeping their homes. But state and federal lawsuits filed against foreclosure law firms and their marketing arms typically cite examples of homeowners who not only paid thousands of dollars needlessly, but also lost their property because they trusted the firms to guide them through the process.

Citing hundreds of millions of dollars in losses to scams, in 2010 the FTC issued the Mortgage Assistance Relief Services, or MARS, Rule to stop the practice. The rule barred companies from taking advance fees for foreclosure relief, which the government viewed as the primary trap for homeowners.

But when writing the rule, federal officials agreed with the American Bar Association and some state bar groups that lawyers should be exempted under certain conditions. Several legal groups argued lawyers would shun foreclosure work unless they were paid up front. The FTC decided to allow lawyers to collect advance fees so long as they kept the money in a client trust account and met other conditions, which have proven difficult for authorities to monitor.

Some states that passed laws to prevent scammers from collecting hefty fees up front also left a significant loophole for attorneys.

Today, it’s clear the exemptions helped encourage rip-off artists to partner with law firms, or at least to give customers the impression they were affiliated with attorneys.

“We anticipated people would get scammed, but not to the level that actually happened,” said Rutledge Simmons, a lawyer and senior vice-president at NeighborWorks America, a housing advocacy group.

California Scheming

In early 2009, state bar associations in California and Florida warned members to steer clear of mortgage-modification deals in which they split fees with non-lawyers, or accepted referrals from telemarketers or other salespeople.

Later that year, a California Bar official revealed that loan-modification complaints were skyrocketing. Calling it a “crisis,” Russell Weiner took the rare step of calling out 16 foreclosure lawyers then under investigation for allegedly fleecing homeowners.

“The number of attorneys using their law licenses to essentially take money from unwary, but trusting consumers is astounding,” Weiner said in an article in the October 2009 California Bar Journal. “There are literally thousands of victims who have lost money they could not afford to lose.”

Yet tough talk did little to protect the public. Since 2010, California, Florida and New York have accounted for nearly 70 percent of the $65 million in losses linked to legal representation complaints, according to the Center’s data analysis. Firms with addresses in Orange County, California, have drawn the most complaints.

California’s role as the scam’s epicenter also is reflected in more than 2,300 orders to halt illegal mortgage modification tactics issued by the state’s Department of Real Estate from October 2008 through January of 2014. It’s not clear how many of these orders stemmed directly from misconduct by attorneys.

Still, many lawyers plied the foreclosure-rescue trade for years in California, Florida, New York and other states in the face of repeated warnings, disciplinary rulings by state bar associations and “cease and desist” orders from civil law enforcement agencies, such as state attorneys general, the Center’s investigation found.

Even though the mortgage crisis has abated in many regions of the country, and complaints have fallen off, they remain a concern.

“This is still going on, surprisingly,” said Melanie Lawrence, ‎deputy trial counsel at the State Bar of California. “One would think over time [lawyers] would come to understand that this is unethical and illegal and stop doing it.”

The California Bar has nearly 100 disciplinary cases either pending or still being actively investigated, officials said.

The Center for Public Integrity examined more than 300 loan modification disciplinary actions taken since early 2009 against attorneys licensed either in California or Florida. (Disciplinary reports from New York aren’t searchable by type, according to the New York State Bar Association.)

While they typically accuse lawyers of multiple violations of consumer protection statutes and legal ethics codes, authorities haven’t been particularly eager to revoke an offender’s law license.

That’s happened in less than a third of California actions, including a lawyer charged in a relatively rare criminal case with bilking thousands of homeowners out of $12 million. Less than 15 percent of the Florida Bar’s orders called for disbarment, records show.

Case files show many errant lawyers had been approached by telemarketers who for decades have flourished in Sunbelt locales, particularly in Florida and California. Some partnered with telemarketers or hired sizable staffs of non-lawyers who handled most of the work but were not properly supervised, as required by Bar rules.

Some practitioners admitted they were overwhelmed by the torrent of business telemarketers could send their way, and rarely had any contact with, or did any actual legal work for, their clients. In disciplinary hearings, some lawyers admitted they were lured in by the easy money they made, while others insisted they did nothing wrong.

As part of their punishment, many lawyers have been ordered to make restitution, at least to people who took the trouble to lodge formal complaints against them. Many don’t pay up, however, pleading poverty. Nearly three dozen of the disciplined California attorneys, many responsible for major consumer losses, filed for bankruptcy protection, court records show.

The California Bar’s client security fund has stepped in and paid out nearly $16 million to compensate people who lost money to about 200 foreclosure lawyers. But half of that payout arose from 10 high-profile cases in which authorities estimated consumer losses were much higher. Most victims haven’t received any compensation.

The Florida Bar’s client security fund, which is more restrictive in compensating victims, has paid out about $400,000 since 2010 for mortgage-relief misconduct involving about 20 attorneys, according to the Center’s analysis of Bar records.

Though they’ve won many large eye-popping court judgments, federal law enforcement agencies have had a tough time actually collecting from offenders.

Most of the $341 million in court judgments the FTC and the Consumer Financial Protection Bureau secured in more than two-dozen enforcement cases since 2009 have been “suspended due to defendant’s inability to pay,” court records show. However, the CFPB is drawing on a special “victim relief” fund to pay out about $23 million.

William Goodrich, a Harvard-educated real estate lawyer well into his 70s, didn’t pay the $38 million default judgment that grew out of his role in a major California loan-modification operation called A to Z Marketing, which the FTC sued for fraud in July 2013.

Goodrich, who at the time was in ill health and used a scooter to get around, filed court papers in September 2013 saying he couldn’t afford to pay an attorney for his defense. He said he had more credit card debt than savings and that his only income was $1,275 a month from Social Security.

A month later, FTC lawyers found out that Goodrich had sold his Orange County home in August 2013 and left the country, moving to Israel.

“He vamoosed,” said Thomas McNamara, a lawyer paid by the court to recover any assets left behind.

Goodrich died in November, according to an email from his wife.

Many California lawyers, including several disbarred for their roles in major foreclosure scams, have taken refuge in bankruptcy court.

Collection efforts have been stymied in many other high-profile cases brought against lawyers.

In August 2015, Massachusetts Attorney General Maura Healey touted a $625,000 court judgment her office won to repay 68 clients of attorney David Zak, based in Revere, who she said for years had targeted Spanish and Portuguese-speaking homeowners with misleading radio advertising that falsely guaranteed them loan modifications.

Zak was stripped of his Massachusetts law license in March after a judge cited his “repeated misconduct” over eight years “involving hundreds of poor, often uneducated, non-English speaking clients, in desperate financial circumstances, and facing the dire prospect of losing their homes.”

In at least two cases, Zak’s non-lawyer associates advised clients to stop making mortgage payments, which resulted in the clients “being forced into foreclosure and losing their homes.”

When it issued the press release announcing the $625,000 judgment, the attorney general’s office didn’t mention Zak had declared bankruptcy.

In May, Zak agreed to pay $20,750 to settle the case.