One difficulty in representing clients who are “under water” on their mortgages is how the lawyer should get paid for his or her time negotiating a better deal for the client.
The client is heavily in debt, but if the lawyer shines, the client could save tens of thousands of dollars. In a listserve post this week, Professor Andrew Perlman asked: What if the lawyer was paid by taking a percentage of the money that the client saved through renegotiating the mortgage?
This kind of arrangement is used in other areas of the law and is commonly referred to as a “reverse contingent fee.” The ABA issued an opinion over 15 years ago, Formal Opinion 93-373, stating that there was no ethical prohibition against charging a client a fee based on a percentage of the money the client would save if the lawyer was successful.
For example, in a lawsuit based on a liquidated damages clause in a contract, a defendant and a lawyer might agree that the lawyer be paid a percentage of the amount saved if the ultimate settlement is far below the liquidated damages amount. The same practice may work in dealing with IRS actions, where the lawyer could be paid based on how much she helps the client avoid paying in taxes, penalties, and interest.
For a client facing mortgage foreclosure, use of a reverse contingency could be tricky.
If the lawyer is successful in reducing the client’s mortgage by $90,000, it is not clear that a standard one-third contingent fee would be reasonable. Two critical components of a reasonable fee are skill and risk. Unlike an ordinary personal injury case, where there’s often a prospect of a lengthy trial (and hence risk to the lawyer), the risk to the lawyer is limited in the mortgage situation (unless there’s some Truth in Lending or other statutory violation the lawyer is trying to use as leverage).
If the case is limited to negotiation, it may not be reasonable for a lawyer to take a third of $90,000 in savings, because it’s reasonably foreseeable that the lawyer’s $30,000 fee would work out to $5,000 or more per hour. Some lawyers are very talented, but $5,000 an hour? A much smaller percentage may be appropriate or perhaps a flat fee depending on the elements of the new mortgage deal (“$5,000 fee if I save you more than $50,000; another $3,000 if I get you an interest rate below 7% with your lousy credit history”).
Payment by the client is a whole other concern. As Andrew Perlman has noted, the savings to the client come in the form of monthly payments over the term of the new mortgage; it doesn’t give the client a new pool of cash with which to pay the lawyer. Most lawyers would rather not be paid $50 or $100 a month for 30 years. In a recent listserve post, Bill Hodes noted that in any up-front payment of a contingency based on future mortgage payments, the lawyer would have to figure out whether the fee was a present value of the payment stream and advise the client of that fact.
In many states, a lawyer might be able to secure payment according to a much shorter schedule by asserting an attorney’s lien against the property, although the lawyer would have to be careful that the lien does not interfere with the mortgagee’s security interest in the property in such a way that the refinancing deal blows up.
Lastly, to the extent lawyers take a security interest in client property to secure their fees, they should determine whether they are entering into a business transaction with a client and follow the ethical rules regarding such dealings.