Mortgage Industry Forward – Part II

By William M. LeRoy, PHOENIX Consulting, L.L.C. & The PHOENIX Group, L.L.C.

Author: William M. Leroy

In my view, the central driving force or “petri dish” behind all the behaviors that have led to the historical issues (including third-party vendors and specifically retained law firms ) we have observed in the past year or so; (i.e.) robo-signing, attorneys having non-legal staff members sign their names to affidavits, notaries public saying they did something, when they have not, attorneys massaging files and not being completely honest with their clients,  and so forth; has been for the most part completely un-appreciated and overlooked by the audits.  As previously mentioned, it is my belief that the key driver is the third party vendors “Culture[i]”.

Simply put, to experience a new “Paradigm[ii]” you need to change your fundamental outlook, world view, past prejudices and open yourself up to a truly NEW approach.  Rest assured, a majority of the regulators and law makers have already experienced a true “Paradigm Shift”. They absolutely think differently about our industry and its various participants. As it pertains to retained attorneys practicing in the mortgage default space, their new Paradigm is “Foreclosure Mills.”

For the record, I despise the term “Foreclosure Mill” and I take great exception to the term, “Vendor” being used to describe an attorney, or the phrase “Vendor Services” being used to characterize the legal work that is performed by a law firm.  The industry perception of legal professionals who practice in the mortgage industry has changed dramatically over the past few years, and not necessary for the good.

Unfortunately there are some “Foreclosure Mill” thinkers within the retained attorney community that have truly earned the label.  The roads that led these individuals to where they are today, have been varied, and in the defense of some, not entirely of their own making. Having to cope with the selection politics and fees schedules created by FNMA and FHLMC, the technology, referral fees and politics created by third party outsourcers, etc., forced some law firms to experiment with processes and procedures that have not always been easily aligned with maintaining the highest legal standards of ethics, practice and review.  The outsourcing model basically confronted many law firms with the proposition that they would have to essentially pay for the privilege to continue to work with their clients. As we have seen, not all legal professionals were able to navigate the ethics of these waters successfully and some have become Foreclosure Mills in the most negative sense of the word.

As we have seen, these particular individuals value process over people, and somewhere along the way, lost their personal and practice ethics and their commitment to excellence.  They have replaced these virtues with arrogance, a lack of empathy, narcissistic behaviors and greed.  Some of these individuals have thus far survived many of the audits and remain very active in our industry. Until this is corrected, there can be no true Paradigm Shift within the retained attorney community or how it is perceived, and the good will be negatively branded along with the not so good, while the not so good continue to contribute to the overall reputational damage of the whole.

The First Step

In order to take the first step towards a fundamental or Paradigm change, we must realize that all of our existing actions and re-actions are based upon, and outflow from our present culture(s) and current Paradigm(s).  Thus, if we are ever to experience a true Paradigm Shift, we must start by recognizing how our current Paradigm / Culture is impacting our thinking and actions. Next we need to make a conscious effort to think and behave differently.  Absent these first two fundamental steps we will never be able to successfully disengage from our present Paradigm / Culture.  Let’s take a look at some of the current Paradigms employed to select law firms to perform legal work related to defaulting mortgage loans and compare them against new ways of thinking that could (and should in my view) become part of a new Paradigm.

Current Paradigm #1

Attorney selection is based solely on the fact that they have been designated by FNMA or FHLMC.

This is one of the “elephants in the room” but we cannot have an honest conversation about change absent a general discussion about the FNMA & FHLMC attorney selection and retention process history.

With all due respect and in some cases with great affection towards the individuals and their efforts, who have worked very hard to try and make these programs workable, I have to be honest here and say that in my view, these programs were somewhat flawed from their very inception, and have now become one of the principal obstructions to industry efforts to improve the attorney selection process.  In point of fact, a FNMA or FHLMC designation these days is ambiguous. One of the reasons for this is that some law firms that continue to carry the designations have been found guilty of robo-signing, and other risk based practices as described in the referenced OCC Bulletins, and yet as of today’s date, they still retain and trade upon their FNMA or FHLMC designations.  Meanwhile, other law firms in the very same jurisdiction who have historically maintained better processes and much higher practice standards are unable to perform the work that their existing or former clients would like them to do.  Even more tragic are the law firms that the folks at FNMA or FHLMC were not aware of at the time of the commencement of the “application process” who were therefore excluded from the process, were not tested, had no chance to become  “designated” and who then lost the ability to represent their existing historical clients.

Additionally, both FNMA and FHLMC have a had a strong “soup to nuts” process preference for many years, which has little or nothing to do with the law firm’s ability to represent their clients in a specific practice area.  In many instances, the preference for an “all in one” approach appears to have been the driving force behind the decision to approve or not approve a particular applicant. In my view, the law firm’s legal sufficiency should have been priority one, reputation and peer review number two, etc., etc. When asked about these particular circumstances (loss of an existing historical client), the typical response from FNMA or FHLMC was to basically shrug their shoulders and move on or direct the applicant to re-apply at some point in the future, etc.  This to not say that there are MANY outstanding law firms in the FNMA and FHLMC Programs. Of course there are many, many, attorneys in the designated networks who operate at the highest levels of practice integrity. My sole point here is that the “designation” in and of itself should not be a standalone recommendation.

[i] Culture can be defined in one of the 6 following ways: 1. the total of the inherited ideas, beliefs, values, and knowledge, which constitute the shared bases of social action. 2. The total range of activities and ideas of a group of people with shared traditions, which are transmitted and reinforced by members of the group. 3. A particular civilization, at a particular period.  4. The artistic and social pursuits, expression, and tastes valued by a society or class.  5. The enlightenment,  refinement or lack of refinement, resulting from these pursuits. 6. The attitudes, feelings, values, and behavior that characterize and inform society as a whole or any social group within it.

[ii] Specifically within the context of this brief discussion; a Paradigm is our perception of reality, our view of the world. It is our interpretation of events based on previous teaching we have received.

About William M. LeRoy, PHOENIX Consulting, L.L.C. & The PHOENIX Group, L.L.C.

An accomplished leader & seasoned legal & mortgage banking professional, Mr. LeRoy is the Founder & Principal of PHOENIX Consulting, L.L.C. and The PHOENIX Group, L.L.C. PHOENIX Consulting, L.L.C., can help to ensure that all Third Party Vendor Management Policies, Procedures, Controls and Audit Processes are in alignment with the most recent regulatory requirements.  The PHOENIX Group, L.L.C., is an emerging group of full service boutique law firms who are restoring credibility to the legal community one law firm at a time.

No Author Biography has been linked to this Article.

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