Taxation & Estate Planning

"Let Them Default"?: A (Former) Real Estate Lawyer's Response to the Lending Crisis

By Joel A. Schoenmeyer

On December 22nd, 2007, this letter to the editor was published by the Chicago Tribune. The letter is interesting in part because it challenges the typical reportage that arises in the wake of a financial scandal. That typical reportage involves dividing the players into villains and victims, while making sure that Mr. and Mrs. Joe Public always fall into the second category.

I wanted to give a little attention to this sentence: "Did these stupid people get no sound advice from anyone, not even their closing lawyer?" I used to practice in the area of real estate law, handling residential closings. I stopped a year or so ago, although I occasionally handle real estate deals if they are connected to probate (my main area of practice).

One of the reasons I stopped practicing in the area of real estate is that it didn't make financial sense for me. The market for real estate lawyers is such that you can charge about $400 to represent someone in a purchase or sale. And, as a solo practitioner, I could spend 15 or 20 hours on a single matter.

If you go to buy a house in Illinois, your team of professionals consists of:

1. a real estate broker, who is being paid a percentage of the selling price for the home;
2. a mortgage broker, who is being paid a percentage of the amount of your loan; and
3. an attorney.

So, who is in your corner? Not the brokers -- they have a clear conflict of interest. And not the attorney, because he or she is usually being paid only a minimum amount to sit with you at the closing and show you where to sign. Some attorneys have tried to charge hourly rates for closings, providing full service and emphasizing the importance of the transaction. My understanding is that many of these attorneys haven't been successful.

I'm not trying to be vindictive, and I'm not trying to suggest that the lending crisis is somehow payback because the American public as a whole decided it didn't need thorough, professional attorneys to handle their real estate purchases. Rather, I'm suggesting that someone who is not conflicted needs to do the analysis as to whether the recommended purchase price + mortgage are the appropriate purchase price + mortgage. That "someone" can be the buyer (crunching his or her own numbers), a fee-only financial planner, or an attorney. Unfortunately, if you aren't sophisticated enough to crunch your own numbers, you aren't going to be sophisticated enough to hire a financial planner or attorney to do it for you. And the unsophisticated folks wind up in default. Which wouldn't be so bad for the rest of us, basking in the glow of our 5.25% 30-year fixed mortgages, except that we now have to pay to bail out the defaulters.

Full post as published by Death and Taxes Blog on January 08, 2008 (boomark / email).