Homeowners facing foreclosure who have been the victims of fraud have little hope of obtaining justice or financial restitution. That was the message of Lionel Ouellette, executive director of the New York City-based advocacy group Changer. He was speaking to a grim-faced group of about thirty Hispanic and African-American homeowners at a community center in the Brooklyn neighborhood of East New York last winter.
Nobody at the meeting had the resources to hire a lawyer for complex legal cases, said Ouellette, a 35-year-old former schoolteacher who became a housing counselor after falling victim to a scam that involved predatory loans and concealed damage in a house he purchased in 2001.
Ouellette pointed out that even if you are fortunate enough to find a legal services attorney to take your case for free, you will most likely spend years in litigation against a major bank that has the resources to hire top law firms. No, legal action is generally not an option, he counseled, pacing back and forth in front of a blackboard. It’s best to get on with your life–try to work out a loan modification with the bank or negotiate a short sale that will allow you to cut your losses and get out of a rotten deal.
“We are very honest with people about what their options are,” Ouellette said in a recent interview. “This is your chance of getting a modification, and this is what the possibilities are of somebody litigating your case–and 99 percent of the time, no one is going to be able to litigate it.”
The abysmal situation that Ouellette described last winter should improve somewhat as a result of a 2010 appropriations bill the Senate passed on December 13. Legislators increased funding for the federally chartered Legal Services Corporation from its 2009 level of $390 million to $420 million and, more important, removed a restriction on LSC lawyers that had barred them from seeking attorneys’ fees when they win cases. Now that this prohibition has been repealed, LSC lawyers should be able to greatly expand their efforts to represent distressed homeowners. In so doing, they undoubtedly will call greater attention to a major aspect of the foreclosure crisis, which has not received enough attention in policy debates.
Certainly many homeowners knowingly took out loans they could not afford, and others either committed fraud or were complicit in fraudulent schemes. However, vast numbers facing foreclosure were victims of complex predatory lending scams and deceptive sales practices that violate a number of federal and state laws. Mortgage brokers frequently forged borrowers’ loan documents without their knowledge and inveigled them into taking out loans they could not afford and should not have been eligible for. Another common scam involved banks, sellers and appraisers conspiring to inflate the appraisal of a house so that a buyer could be conned into buying it for much more than it was worth. And in some cases, mortgage brokers who did not clearly explain to borrowers the terms of “high cost” mortgages (loans padded with fees above an established threshold) were violating the federal Truth in Lending Act.