The New York Times has a story about some lawyers in Florida who are getting creative about the way they get paid by clients they are helping to fight off foreclosure. In order to pay their legal fees, these homeowners are taking out second mortgages to pay their legal costs. At first glance, this might seem like a bad idea and even unethical, but I think it probably needs some deeper consideration before jumping to conclusions.
While it doesn’t seem to make sense to take out more debt to keep a loan that the homeowner is having trouble paying anyway, Americans’ emotional ties to their homes can make this decision understandable. And the way these lawyer mortgages are structured, they only pay a portion of the amount by which the homeowner’s original mortgage is reduced. For example, if the original mortgage was $500,000 and is reduced by, say, $100,000, then the homeowner would sign a new mortgage for a percentage of that $100,000 to pay legal fees. Plus, the second mortgage kicks in only if the lawyer is successful.
Unfortunately, the story doesn’t get into just how successful these lawsuits are. In Colorado there are very few defenses to a foreclosure, with the primary one being that you paid on a loan someone is now trying to foreclose. Beyond that, proving that a lender improperly foreclosed can be a long, drawn out fight with questionable predictable results.
Read the rest of the story here.