Lawyers Are Looking at the Last Mortgage Collapse to Help Prepare for Coronavirus-Related Economic Crisis
An increase in flexibility could lead banks to be more lenient with borrowers upfront to avoid having to operate large properties like shopping malls.
May 28, 2020 at 03:06 PM
4 minute read
The original version of this story was published on Daily Business Review
The mortgage crisis during the Great Recession offers lessons for lenders, as well as commercial and residential landlords and tenants, to weather our current pandemic-related economic crisis.
Richard Lawson, a partner at Gardner Brewer Martinez-Monfort in Tampa, said consumer protection issues are the "ultimate lagging indicator." It is a concept Lawson learned when he served as the director of the consumer protection division for the office of former Florida Attorney General Pam Bondi at the height of the state's post-crisis mortgage market investigations.
Although the previous economic collapse occurred in 2008, Lawson observed that it was not until 2011 that the problem with foreclosures erupted. The aftermath of the Great Recession has primed officials to be on the lookout for fair lending issues and other potential abuses as borrower assistance requests start to pile up.
The investigation also found that the biggest dispute with consumers was not over a monetary judgment, but rather lenders' efforts seeking injunctive relief to obtain control over their collateral.
As a result, a massive influx of people were looking for mortgage modifications and assistance, but these aims were not "moneymaking ventures for banks." Banks had significant problems with adequate staffing and developing a central point of contact for consumers to resolve their issues.
That same problem is facing major banks again with the U.S. Department of Labor reporting Thursday slightly over 40 million jobless claims, or 1 in 4 American workers being unemployed since the coronavirus was declared a pandemic in mid-March. Florida was the state with the second-highest new unemployment claims last week, with close to 174,000, trailing only New York.
Jamie Zysk Isani, a partner at Hunton Andrews Kurth in Miami, said a difference between the previous mortgage crisis in 2008 to today's economic downturn is that banks are subjected to many more regulations.
"Banks are more focused on regulatory compliance, so that will probably shift to some of these new laws," Isani said. "Particularly on the commercial side, you'll probably see more flexibility."
That increase in flexibility could lead banks to be more lenient with borrowers upfront. For instance, a bank might avoid foreclosure on a shopping center to avoid having to operate that property. While on the residential side, Isani said lenders have learned a lot more about how to modify mortgages, as a result of programs passed after the Great Recession.
"You got these federal regulations right now, federally backed mortgages, that are providing some relief for homeowners," Isani said. "But banks may on their own have more assistance in place now than they did then to consider for requests for forbearances or loan modification."
Isani warns that banks could potentially face litigation with representations that could be misconstrued. The Hunton Andrews Kurth partner, whose practice areas include complex business and financial services litigation, said it is the bank's representations to borrowers that could get the institutions into the most significant trouble.
For instance, attorneys advise banks against making sweeping statements about product offerings and policies before knowing how the pandemic might affect operations.
"If you are trying to comply with the law and your compliance might be slightly defective, it will not result in substantial liability," Isani said. "But when representations are made that consumers alleged are misleading, that's where banks tend to see the larger claims and the higher likelihood for liability."
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