Three years ago real estate lawyers were in the paper business. We believed that our clients did well in real estate, or business, in part because we documented what they got themselves into. They had smiles when they came in for real estate deals because they were selling, and taking profits that were the result of wise investment decisions, or they were expectantly getting on the real estate train, or we know now, signing up for another of many rides on that train.
All of us were so smart 3 years ago that we figured out several important financial truths:
1.There is no relationship between earned income and the amount we can or should borrow, and in fact the most celebrated are those who learned from late night television that we could get in the real estate game with no personal money at all.
2.Quality of construction, planning, parking, and value are not nearly as important in real estate as comps, leverage, and for 1031 target property, date of availability.
3.Mortgage rates and terms are not important, since no-one intends to keep property anyway.
4.Most important, our system of government and economics is magically better than those of the rest of the world. Everyone we know makes money by owning property, holding it, and selling for a profit. We don’t do anything.
What we did not know 3 years ago was that Wall Street was even more imaginative, self accommodating, and arrogant than any salesman or mortgage agent. Totally unregulated Wall Street Brokers were committing grand scale fraud by creating collateralized debt obligations, and triple –A rated bonds backed by the trash mortgages created in local markets, closed by us. To those in charge, Federal regulation at any level was abhorrent, and even traditional secondary markets became conspirators by looking the other way. Without question the mortgage industry at every level sold its integrity and wasted its believability for short-term profit and bonuses.
I’ve practiced law for something like 35 years. I feel like an airline pilot who has been sitting in the same cockpit, flying over the same land, watching landscape change, but never completely. Now, I’ve broken out over an entirely new world. I’m sitting in the same chair and the instrument panel hasn’t changed, but the view is entirely different, and it is shocking.
So what does this have to do with Short Sales? The answer, is “everything”.
You can’t do, or attempt, a short sale without a mortgage company asking why the borrower cannot make his payments as agreed. You will see that there is a list of suggested reasons, such as “heart attack” or something equally devasting, from which you are expected to select.
The mortgage fraud statute certainly applies to us when we close a loan, and we should assume it applies when we re-work or amend one as well. That’s what a short sale does.
What do you do when the real reason this person can’t pay is that this borrower was doing exactly what everyone else was doing 3 years ago – they were participating in the American System, trying to get on the real estate train. By tradition, a train that travels straight to wealth and security. If one of our ‘Short sale” clients had actually had a heart event, it was all probability caused by stress over unpaid mortgages. There is no block in the short sale paperwork for buying too much, too stupidly, or in fact for just “doing what everyone else was doing”.
As lawyers, or agents of lawyers, these are strange times. By history, training, and sometimes by personality, we are paper lawyers. We make our living handling paper. The right to do that paperwork is our living. But in this new world, we are not paper lawyers. Our clients are now people, not paper. You can’t possibly advise someone about the downside of failure to pay a mortgage without a decent understanding of that person’s affairs. For that you must get inside his finances. A person’s personal discipline and spending habits, define to a great extent who he (or she) really is, and that will play a role in your advice. Advising a man desperate for money that he can quit making a mortgage payment without consequence is not that different from whispering to a drowning man that he can rest now, and quit swimming. Exactly what he wanted to hear may be the worst advice you could ever give.
We owe it to our clients, to our profession, and literally to mankind, to understand the responsibility we take by the advice we give. To be self-serving and more direct, the widespread belief that mortgage payments can be disregarded without consequence would destroy housing and real estate, and would collapse what every one of us does for a living.
Finally, if for years you got your business from Realtors or Mortgage Companies, and even if you represented them in closing, your client now is the person you undertake to represent. That client will probably be the person in your office, and the person who pays you. It is his interests – or hers – that you must represent, and not that of your traditional business source.