SUPPLIER AND TECHNOFIN®

Foreclosure rescue scams: how to avoid getting caught?

The housing market has a huge impact on the vitality of our economy. Among other important benefits, there is growing evidence that homeownership stabilises communities and contributes to lower crime rates and better school scores for children.

The housing market has a huge impact on the vitality of our economy. Among other important benefits, there is growing evidence that homeownership stabilises communities and contributes to lower crime rates and better school scores for children.

Beyond the socioeconomic advantages, housing has an enormous impact on individuals and families.

A house is the largest asset most Americans own and homeownership rates in this country continue to rise.

The boom in subprime mortgage lending has greatly expanded homeownership opportunities, contributing to a homeownership rate of 69 percent in the United States, the highest percentage in history.

The good news, however, is tempered by recent troubling developments. Mortgage delinquency rates have been rising; in fact, fourth quarter 2006 produced more foreclosure filings than in any of the previous three quarters that year.

The increase in the number of properties in foreclosure is driven in part by the slowing of housing sales and the impact of rising mortgage payments, particularly for borrowers with weaker credit profiles who hold certain types of adjustable-rate mortgages (ARMs), such as subprime hybrid ARMs.

In addition to these factors, financial hardship or other circumstances beyond their control, such as job loss or the high expenses associated with a major illness, can cause homeowners to fall behind on mortgage payments, putting them at risk of losing their homes to foreclosure.

Compounding the problem are opportunists who exploit other people’s misfortune through disreputable and deceptive means.

Some of the fastest growing frauds — and, for the people who perpetrate them, the most lucrative — are “foreclosure rescue” scams.

Foreclosure rescue scams target homeowners facing foreclosure, particularly if they are equity-rich but cash-poor. Rescue scams cost consumers thousands of dollars and, often, their most valuable asset — their homes.

The elderly, and people with low incomes or blemished credit, are particularly vulnerable. With foreclosure rates on the rise, foreclosure rescue scams are also increasing. Information to counter such scams, including steps homeowners can take to protect themselves, follows.

Common types of foreclosure rescue scams

Perpetrators of rescue scams promise much-needed help to homeowners in financial straits. The fraudulent practices generally fall into the following three categories.
 
Phantom help - The rescuer charges exorbitant fees for telephone calls and paperwork that the homeowner easily could have handled, or promises robust representation and services that never materialise.

In either event, the homeowner may have little or no financial resources remaining to save the home.

 Bailout - The rescuer bails out the homeowner by helping “dispose of” the house. The homeowner typically surrenders title to the house while believing they can stay on as renters and buy the house back once they resolve their financial matters.

The terms are typically so onerous, however, that repurchase becomes impossible, the homeowner permanently loses possession, and the “rescuer” walks off with all, or most, of the homeowner’s equity.

Bait and switch - Rescuers tell the victims they will obtain a new loan that will solve their problems.

In reality, the homeowner signs forged documents that give the scammers ownership of the home.

In many of these cases, homes are acquired for a very small fraction of their actual value.

The homeowner still holds the note and mortgage on the home s/he no longer owns, including repayment obligations.

Many homeowners believed they were signing documents for a new loan to make the mortgage current, or arranging for an intermediary to negotiate more favourable terms with the lender.

Victims say they had no intention of selling or giving up their home, although there frequently is no written documentation to substantiate agreed-upon terms and conditions.

How do rescue scams work?

Based on a review of cases and reports from consumer attorneys, law enforcement officials, and the news media, the following list comprises tactics frequently used in foreclosure rescue scams.

While these programs can work to some extent for some borrowers, homeowners should carefully consider and review foreclosure rescue offers, especially when the potential “rescuer” seeks them out.

When a lender forecloses on a property, a public notice that helps identify distressed homeowners is published in a newspaper of general circulation or at local government offices.

These records are more accessible than in the past because they are increasingly computerised, with a growing number of private firms compiling and selling lists of defaulted loans and foreclosures to different parties.

How do companies successfully lure borrowers into rescue arrangements?

As described in a National Consumer Law Centre Report, here are a few commonly used ploys. Employing saturation marketing of purported rescue services, commonly characterised by exaggerations, misrepresentations, and pressure tactics.

Capitalising on the homeowner’s desperation to save the home, obtain needed cash, or make a fresh start, generally conducted in a manner in which the homeowner is encouraged to conclude there is very little time to act.

Exploiting the homeowner’s belief that someone would not lie to his or her face - reinforced by many sympathetic-sounding and often face-to-face sales pitches - or the false assurance that one is being helped when, in fact, the homeowner is left in a worse financial position.

Keeping homeowners “in the dark” about the foreclosure process. This includes failure to provide information about foreclosure deadlines, legal rights, and low-cost alternatives that can save the home.

Using various fraudulent and deceptive documents including forgeries

Scammers use many complex documents that disguise the rescuer’s equity-stripping intent. Unscrupulous companies also may use documents that run out of space for signatures on pages containing critical text.

The homeowner signs a blank page, and his/her signature is fraudulently transferred to an entirely different documents.

Using affinity-marketing strategies

These approaches appeal to the homeowners’ belief that people who share similar ethnic, racial, religious or age profiles are their advocates, protecting them from those who don’t act in their best interests.

Rescue scammers: How they set the trap

At this point, the lender has not yet foreclosed on the property, although foreclosure is threatened after the homeowner falls behind on mortgage payments.

 Initial discussions emphasise a “fresh start,” and often feature “testimonials” from other homeowners the rescuer has supposedly helped.

Scammers may instruct the homeowner to cease all contact with lawyers or the mortgage lender and let the rescuer handle negotiations. This tactic cuts off access to refinancing options while running out the clock on legitimate ways to prevent the foreclosure.

The homeowner loses the property when the scam is completed or the house is sold to someone else at foreclosure.

If there is a foreclosure sale, there may be little, if any, equity remaining because repeated and excessive fees have stripped it from the property’s value.

If foreclosure is imminent: what you can do

The following outline advises homeowners on constructive ways to deal with pending foreclosure: Do not panic or avoid the issue. The problem will not go away, and will worsen if ignored.

Make sure that your home actually is in foreclosure. If you are behind in your mortgage payments, you will receive a delinquency notice from the lender.

These letters notify you of your delinquency and give you a chance to resolve the debt. If you receive a Notice of Trustee’s Sale, or similar document, your home is in foreclosure, and you need to respond accordingly.

Ask your lender about renegotiating or refinancing your loan or working out a payment plan.

Be honest about your financial situation. The sooner you contact your lender, the sooner you may be able to remedy the problem.

The federal bank, thrift and credit union regulatory agencies are encouraging financial institutions to work with homeowners who are unable to make mortgage payments.

The regulators also have advised financial institutions to consider working with reputable consumer advocacy entities to help financially stressed borrowers avoid predatory foreclosure rescue scams.

Familiarise yourself with state foreclosure laws. It’s important to know how much time you have to resolve the issue, including when you would forfeit legal ownership of your home.

An individual or a company, armed with this information, contacts the homeowner, offering to lend money to “stop foreclosure” or “save your house.” These businesses often refer to themselves as foreclosure consultants or foreclosure rescue specialists.

Initial contact may occur by telephone, personal visit, or card/flyer left at the home, and often consists of a simple yet powerful message such as “Stop foreclosure with just one phone call,” “I’d like to $buy$ your house,” “You have options,” or “Do you need instant debt relief and cash?”

Contact your attorney, not one referred by the individual or company that is involved in the foreclosure prevention/ agreement.

Contact a government-approved housing counsellor. The Department of Housing and Urban Development (HUD)’s Web site lists certified counsellors by state at http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.

Contact the Better Business Bureau at www.bbb.org before entering into any agreements promising homeowner debt relief.

Obtain a report on the company and check with the state attorney general’s office and Real Estate Commission for a record of complaints and other adverse actions.

Do not sign a contract under duress and request time to review documents. If you do not understand a document’s contents, ask a trusted family member, attorney, or financial planner to review the documents with you.

Do not accept verbal representations. Obtain offers in writing, and review all written offers thoroughly.

There are legitimate organisations, including non-profit consumer groups, which provide services to distressed homeowners.

Reputable foreclosure rescue companies will work with borrowers who are unable to meet their mortgage obligations, and assist homeowners in making mutually satisfactory workout arrangements with their lenders.
 
Stacy Messett
Senior Project Manager
Compliance and Consumer Protection
Office of Thrift Supervision
Department of the Treasury, US

Entry Filed under: SUPPLIER AND TECHNOFIN®, Legal & Regulatory Issues, Risk Management, Compliance