Bad times, unfortunately, sometimes bring out the worst in people. That's particularly true in the case of scam artists, who tend to proliferate during economic downturns. As the number of homeowners at risk of foreclosure or in other financial difficulty has grown, there's also been an increase in the number of con artists seeking to profit from their misfortune.
The FTC has recently announced a nationwide effort to crack down on mortgage modification scams, called Operation Loan Lies. The initiative, which involves coordinated efforts with 23 states attorneys general and other agencies, has so far initiated actions against 178 companies accused of offering bogus loan modification assistance, charging large fees up front to help consumers renegotiate their mortgages, but then failing to deliver on their promises.
Foreclosure and mortgage modification scams can take a variety of forms. Homeowners who are in financial difficulty and are at risk of foreclosure need to be aware of them in order to avoid becoming a victim and possibly ending up in even worse financial straits than before.
What these scams often share in common is that 1) the scammers seek out the homeowner, rather than the homeowner approaching a legitimate servicer and 2) they seek payment up front for their services, often in the form of a cashier's check that allows them immediate access to the money. Both are red flags that should alert homeowners a potential scam is afoot.
Some of the more common mortgage assistance/foreclosure avoidance scams are:
Loan modification scams
This is perhaps the most common one. These companies seek out homeowners who are falling behind on their mortgages and offer to help work out a loan modification or otherwise renegotiate the mortgage to more affordable terms. They typically charge a very large up-front fee, perhaps several thousand dollars, for this "service." They then pocket the fee and make little or no effort to renegotiate the loan, and refuse to refund the charge when the customer complains.
There are loan modification companies that will make an effort to renegotiate a customer's mortgage and may succeed in doing so. However, in many states it is illegal to charge for such services in advance. In addition, nonprofit credit counseling agencies can help homeowners achieve the same results for little or no fee. Many housing counselors say there is never a need to pay for loan modification services unless one is filing for bankruptcy and needs to contract an attorney.
Fake government programs
These are similar to the above, except that the perpetrators claim to represent HUD, the FHA or another government agency. They offer to resolve a homeowner's mortgage problems, for which they charge a significant fee up front, then pocket the money and disappear. While HUD does certify nonprofit housing counselors, such counselors will not approach or solicit individual homeowners, as the scammers commonly do, nor do they charge more than a nominal fee for the service.
Bait and switch
In this scam, the perpetrator offers to arrange for a new loan on more flexible terms to replace the current one. However, the loan documents actually end up paying the scammer, rather than bringing the original mortgage up to date. In another variation, the loan documents actually transfer ownership of the property to the scammers, who then use it to obtain a loan for themselves. In either case, the homeowner may not be aware of the scam until the property is foreclosed.
A perpetrator may claim to be an expert in exotic financial instruments or legal tricks than can be used to eliminate or reduce debt. In some cases, they may try to sell homeowners a certificate resembling a cashier's check that they claim can be applied to the mortgage. Of course, they charge for these services. And of course, the services are worthless.
Rent to own
A homeowner facing foreclosure may be tempted to sign their property over to a "white knight" investor who offers to allow them to stay in the property through a rent-to-own agreement. But the agreement is structured in such a way that makes it virtually impossible for the homeowner to ever reclaim the property.
Here, the perpetrator offers to sell the property for the homeowner in order to avoid a foreclosure and perhaps even recover some of their equity in the home. However, the homeowner is required to deed the property over to the scammer.
The scammer then uses the property to obtain aloan and retain the proceeds, perhaps after first bringing the mortgage up to date. Or, the scammer may require the homeowner to vacate the premises and then rents it out to someone else until the property is foreclosed.
Again, a common thread in most of these scams is that the perpetrator identifies potential victims and then approaches the homeowner with an offer of assistance. In these and other cases, the key is buyer beware. If you suspect a fraud or are simply unsure about a loan modification or foreclosure avoidance arrangement you are considering, a good bet is to contact your local Better Business Bureau or office of your state attorney general, who can help you determine if the offer is legitimate.