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I’ve been reading about certain “contingency fee” mortgages that some attorneys are having their clients sign. Specifically referring to a New York Times article written by David Streitfeld on November 6th, 2010 entitled, “Taking On a Second Mortgage to Pay the Lawyer,” Florida foreclosure attorneys have devised a new and creepy way to have clients pay inflated attorney fees.
In short, the scheme is that the attorney charges a contingency fee of 40% for whatever the attorney saves the client in terms of a mortgage loan modification and/or principal reduction. However, instead of having the client pay the fee out of their pocket (which is impossible because all that is gained is equity and a lower monthly mortgage payment), the client agrees to take out a second mortgage in the law firm’s name to pay the contingency fee.
There are many issues here, and pardon me for sounding the “foreclosure scam” alarm with regard to what on paper appears to be an inventive way for the attorney to guarantee being paid. In short, the client is essentially signing over to the attorney a security interest in their home in return for providing a service which is supposed to have the end goal of lowering the homeowner’s mortgage payments to a fair and affordable amount. However, charging an unreasonable contingency fee which attaches to, encumbers, and uses the home itself as security for payment of that contingency fee inevitably defeats the purpose of the loan modification because it will unnecessarily increase the monthly cost of the mortgage payment.
Then, as soon as the homeowner falls short of paying the second mortgage to the attorneys, regardless of what they claim they will or will not do, the law firm immediately has the right to declare a default on the second mortgage, accelerate the entire debt as being immediately due, and can foreclose on the home judicially or non-judicially, depending on the state in which the property is in.
In other words, the homeowner who contacts the law firm for help to protect them from losing their home to the bank signs over a security interest in the home which in the end will cause them to lose that very home the lawyer was sought out and paid to protect… to that lawyer.
While this is not a classic foreclosure scam, it still smells like one. The lawyer is taking advantage of the fact that the homeowner does not have any other choice than to pay their inflated contingency fees. However, the contingency fee should be commensurate with A REASONABLE FEE, not how much the attorney can save the client. This model of charging a percentage of what is saved works well when it is a few thousand dollars, as is often done with tax assessors. However, with a home which is easily worth hundreds of thousands of dollars, taking a 40% cut of whatever is saved (which can often be hundreds of thousands of dollars) would constitute an excessive fee.
On top of that, there are a number of ethical and legal issues with making such a transaction which would place the financial interests of the attorney and the client to be adverse to one another. This raises ethical issues which will not be covered in this issue.
In summary, before agreeing to such a “contingency fee” security interest deal, ask yourself whether the amount of money you will save (and that the attorney will consequently earn) would constitute a REASONABLE FEE for the services rendered.