What is a foreclosure scam?
Foreclosure scams often involve multiple or fraudulent bankruptcy petitions used to delay foreclosure on a property without any intent to actually make good on the bankruptcy filing. Homeowners who are in danger of losing their homes or that have filed for bankruptcy are approached by scam artists who claim they can help them reduce their mortgage payments and keep their home. The scammers make promises, such as guarantees to stop foreclosure and “save” people from losing their homes. They also may promise to lower mortgage payments, and frequently ask for an up-front fee. Scammers may pretend that they have direct contact with mortgage providers when they do not. In reality, they have no intent to follow through on their promises and help anyone keep their home.
What started this? Foreclosure scams have been happening for many years and were of particular concern in California in the mid- to late-1990s. Most recently, though, the economic collapse of 2008 led to a huge wave of foreclosures as our economy began to crumble. Banks and lenders knowingly bet on high-risk residential mortgages, and when the bubble burst, banks were stuck with millions of mortgages that could not be repaid by their debtors. Foreclosures quickly followed, and, with them, came the scam artists.
Types of Foreclosure Scams
Phony Counseling or Phantom Help The basic premise of this fraud is that the scam artist will approach distressed homeowners and tell them he has the ability to negotiate a deal with their lender to reduce their mortgage payments and save the home. They might:
Claim to work for a law firm or credit counselor Tell homeowners not to contact their lender, lawyer or credit counselor Promise to handle all the details for an up-front fee Request that payments be made to them instead of the mortgage provider
Once they have collected their up-front fee or a few mortgage payments, they cut-off all communication and disappear, having done nothing to help owners keep their home.
The “Forensic Audit” – This scam has a similar beginning to the phony counseling or phantom help scam – someone holding themselves out to be a loan “auditor” offers to have an attorney or other expert review a homeowner’s loan documents with their bank for an up-front fee. The “auditors” claim that they will prepare a report to see if the lender complied with the applicable laws. They claim this report will be able to help the homeowner:
Avoid foreclosure Speed-up the loan modification process Reduce their monthly mortgage payments Cancel their loan
In reality, these forensic “audits” do little, if anything, to help you with your mortgage or modify your loan.
Rent-to-Buy Schemes – In this scheme, the fraudsters will tell homeowners that in exchange for surrendering title to their house they will allow the homeowner to remain in the house and rent it for a fee. In the meantime, they promise to sort out the foreclosure process. They claim that by surrendering the title, this will allow a new homeowner to establish better financing, thereby reducing the mortgage payments. Unfortunately, the terms of the new deal and financing are so bad that the former homeowner is never able to buy back the house. The person that obtained the new financing on the home will then default on the loan and the original homeowner is evicted.
In one variation of this scheme the scammer raises the rent over time so that the homeowner cannot afford it, and then the original homeowners are evicted by the new owners. This leaves the scammer free to sell the house.
In another variation of this scheme the scammers offer to find a buyer for the home if the owner signs over the deed and moves out. The scammers promise to pay the homeowner a portion of the profit when the home sells. After the transfer, the scammers just rent the home out from under the owner and pocket the proceeds, all the while the lender is going ahead with the foreclosure. In the end the home is gone and the original owner is still on the hook for the unpaid mortgage. The original homeowner is usually surprised to learn that their transferring the deed did not erase their unpaid debt.
Bait-and-Switch – In a bait-and-switch scam, con artists approach distressed homeowners with papers they claim the owners need to sign to get another loan to make their mortgage current. Buried in the stack is a document that surrenders the title to the house to the scammers in exchange for a “rescue” loan (ie: a loan that supposedly will save the homeowners from foreclosure). In reality the “rescue” loan does nothing and the homeowners have lost the title to their homes.
Scammers utilize all sorts of unscrupulous tactics to take advantage of distressed homeowners. Usually the scams begin with an offer too good to be true. Below are a few of the “catch-phrases” and warning signs that might tip you off that you are dealing with a scam artist:
Demands for an up-front fee Guarantees to get a loan modification or stop the foreclosure process – no matter what the circumstances Tells you not to contact your lender, lawyer, or housing counselor Claims that all or most of its customers get loan modifications or mortgage relief Accepts payment only by cashier’s check or wire transfer Tells you to make your mortgage payments directly to them, rather than your lender Suggests a property title or deed transfer Offers to buy your house for cash for much lower than the selling price of similar houses in your neighborhood Exerts pressure and says the “deal” must be made immediately
Some Basic Do and Don’ts
Do not ignore the problem – facing and dealing with foreclosure is not an easy process, but ignoring it will only make it worse. Do make sure that you are in foreclosure before taking action. If you are behind in payments, you will receive what is called a deficiency notice. 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, you are in foreclosure. Do work directly with your lender to restructure your payments or refinance your loan. Do know the law – we will cover this in the next section. Do not sign anything if you are being pressured or are under duress. Do not make payments to anyone other than your lender. Do not sign a contract to sell your home that does not release you from the obligations of your current mortgage. Do sell your home, but only if that is your last option to avoid foreclosure.
Legislation and Legal Options
Making Home Affordable Act (MHAA) – The MHAA is a key piece of legislation passed by the Obama administration to help homeowners facing foreclosure. It is not so much a series of legal requirements for dealing with foreclosure, but an assistance program available to eligible homeowners.
MHAA – Lower Your Mortgage Payments – One of the ways in which MHAA can help distressed homeowners is to work with them to lower their mortgage payments. Certain eligible homeowners could see their payments lowered by up to $500 per month. There are options for families who have seen the value of their home decrease. Under the MHAA, the following programs are available to qualified homeowners:
Home Affordable Modification Program (HAMP) Principal Reduction Alternative (PRA) Second Lien Modification Program (2MP) FHA Home Affordable Modification Program (FHA-HAMP) USDA’s RHS Special Loan Servicing Veteran’s Administration Home Affordable Modification (VA-HAMP)
MHAA – Work with a HUD Approved Housing Counselor For Free – The MHAA has a number of other programs to help homeowners, and one of these is to work with a HUD-approved counseling agency. Counselors can help homeowners decide which options are best for dealing with their mortgage problems. Other programs available under the MHAA can help homeowners lower their interest rates and get help with a second mortgage. These programs also can help homeowners distressed due to fallen home values, and may assist owners in finding a way out of their mortgages and homes. Boulder County Housing Authority (“BCHA”) has counselors who can help you with respect to these issues.
Truth in Lending Act (TILA)
Unlike the MHAA, the TILA is more regulatory and is designed to help consumers stay informed about the lines of credit they receive. The law is an attempt to keep consumers aware of how fees are calculated in borrowing and to standardize the costs the borrowers incur.
Specifically with respect to homeowners, the TILA includes special rights regarding cancellation of certain home equity and other loans secured by the homeowners’ primary residence. Under these rules:
Homeowners have a right to rescind, or cancel, a loan other than a loan used to enable their purchase of the residence. For example, this right usually applies to home equity loans consumers get after they have already bought their homes. This right to cancel lasts for 3 business days, essentially giving homeowners a “cooling off” period to be sure of their decision to sign the loan agreement. The lender must disclose to the homeowners that they have this right to cancel the loan for up to 3 business days. If the homeowners do not receive notice of this right to cancel, they get an additional 3 years to cancel the loan.
However, note that these rules do not actually regulate the amount that lenders can charge for loans. The TILA is simply a series of requirements to keep consumers informed and encourage people to consider their options and different loan requirements.
Home Ownership Equity Protection Act (HOEPA)
The HOEPA is actually an amendment to the TILA and relates to certain loans with high rates and/or high fees. What loans are covered?
For a first-lien loan (ie: the original mortgage on the property), where the annual percentage rate (APR) exceeds by more than 8% the rates on Treasury securities of comparable maturity For a second-lien loan (ie: a second mortgage), the APR exceeds by more than 10% the rates in Treasury securities of comparable maturity The total fees and points payable by the consumer at or before closing exceed the larger of $592 or eight percent of the total loan amount. This amount is adjusted based on changes in the Consumer Price Index. Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.
Loans to buy or build your home are not covered. If your home loan qualifies, you must receive additional disclosures about the APR and monthly payments 3 days before closing. The lender must also tell the borrower that they are not obligated to go through with the loan just because they have received the required disclosures, and they may lose their home if they do not meet their obligations.
What To Do if You Need Help
Your first step after realizing, or even suspecting you have been caught in a scam should be to contact a consumer protection attorney and the appropriate government agencies. The Federal Trade Commission (“FTC”) is a good place to contact if you feel that you have been taken advantage of in your home loans, and the FTC has procedures in place for you to file a formal complaint.
If you need help with your mortgage payments or refinancing your home, contact the MHAA program and your mortgage provider directly. Resist the desire to panic and be sure to consider all your options. Be wary of “quick fix” schemes. There are no “quick fixes,” but there are means for solutions. There are also programs out there to assist you.
http://www.ftc.gov/ http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm http://www.makinghomeaffordable.gov/pages/default.aspx http://www.loanscamalert.org/things-you-should-know.aspx http://www.nfcc.org/housing/index.cfm