Just when you thought you'd seen the end of subprime mortgage lending practices, a new scam has entered the marketplace. Many of the unethical brokers who brought us the subprime debacle have resurfaced, and are now offering mortgage fraud disguised as loan modifications.

You would think that the people who helped inflict the subprime mortgage crisis on America might consider another line of work. The industry has crumbled, and lenders are keeping their portfolios as clean as a whistle for the foreseeable future.

But when the going gets tough, scam artists find a way to get going. They've staked out a whole new niche--loan modification scams.

Mortgage rate modification: The good and the very bad

The economy is in brutal shape, and many people aren't thinking about mortgage fraud. They're thinking about innovative ways to avoid foreclosure. An increasingly viable option has become the mortgage modification, in which a lender restructures a loan. A term and rate modification can alter the monthly payment on a mortgage, providing just enough wiggle room so that a borrower won't lose his or her home.

Lenders are willing to work with borrowers but, with the rash of foreclosures, many are overwhelmed. Non-profit counseling agencies can't keep up with the demand, either. This has opened the door for the unsavory mortgage fraud artists, and they're coming in droves. These individuals, many of whom are former mortgage or real estate brokers, will promise to handle the loan modification process, charging an upfront fee of $1,500 to $2,000 for their services. Some of these individuals are legitimate, but many are fraudulent.

Avoid the loan modification scam

To keep out of harm's way, only work with a broker who's currently licensed and has a guaranteed success rate. Don't be shy about asking for references, including people who can verify that the broker is legitimate. Check with a lender to see if they've dealt directly with your candidate. Mortgage bankers want to avoid foreclosures, and even if they're overwhelmed, they can at least direct you to credible assistance.

Also check in with the Better Business Bureau. The loan modification scam is no longer under the radar, and government agencies are beginning to shut down many of these operations. Information is always the key to avoid such scams, so talk to as many people as possible about the reputation of a loan modification specialist. No matter how dire your situation may seem today, it will only get worse if you fall for a fraudulent scheme.

The subprime lending crisis caused a lot of pain and suffering among borrowers and lenders alike. Now that the smoke is beginning to clear, and people are taking steps to restructure their loans, be extremely careful not to fall victim to the same shady lending practices that caused many of the current problems in the first place. Before you undergo a mortgage rate modification, check a broker's references and double-check your deal. In this economy, you definitely don't want to make a bad mortgage decision.

Published on March 3, 2009