Foreclosure Scams Lurking In Your Area
May 30th, 2008
Delinquent homeowners looking to break free from default notices are getting tricked by brokers promising to save them from foreclosure, only to make off with thousands in fees or what home equity is left.
Take rent-to-buy scams. In cases like these, a fraudulent rescue company convinces a homeowner to sign over the title while building equity as a renter. The homeowner avoids foreclosure but risks being evicted by the very firm that promised to save his home.
The situation is bad enough in Florida, one of the nation's foreclosure capitals, that State Attorney General Bill McCollum has filed suit against National Foreclosure Management, a mediation company, for allegedly defrauding troubled homeowners; fraudulent rescue companies in Illinois have been increasingly penalized, while in Massachusetts the for-profit practice of foreclosure rescue transactions has been banned.
It's no wonder such scams are surfacing. In April, there were 243,353 foreclosure filings, according to RealtyTrac, an Encino, Calif.-based broker of foreclosed and bank-owned properties. That's 2% of the nation's homes, and the highest monthly figure since RealtyTrac started compiling data in January 2005. While this has damaged home values in many markets, areas of California, Florida, Nevada and Arizona are among the hardest hit.
With rising foreclosures threatening homeowners, rescue brokers prey on subprime or adjustable rate borrowers because many facing foreclosure are overextended and desperately looking for a way out of their mortgages.
"A lot of people did not have the necessary reserves or backup plans," says Marki Lemons, who specializes in foreclosure properties for Rubloff, a Chicago real estate firm. "No one anticipated that the market would change overnight like this."
It hurts to lose a few hundred dollars, or even a thousand, but the wilier schemes involve surrendering the title.
The most basic involves pushing on homeowners' phony documents that appear to be a new mortgage application. These are known as rescue loans which, if correctly represented, give a homeowner the cash to stave off a foreclosure. Instead, these false documents turn over the title.
A more sophisticated version of this scam involves a rent-to-buy provision. Here, a mediator matches a distressed homeowner with a management company that takes over the property while giving the homeowner the ability to become a long-term renter, with his rent paying down the mortgage.
The premise here is that the management company has great credit and can refinance at a better rate, which they will do for a fee. This arrangement is attractive to a delinquent homeowner because the months-long foreclosure process is a black mark on a credit report.
"By the time a delinquent loan goes into the foreclosure process, borrowers typically are behind many months in payments, and the debt has grown with late fees and other charges," says Peggy Twohig, associate director of the Division of Financial Practices at the Federal Trade Commission. "Because of the late payments, the borrowers' credit histories have deteriorated."
Of course, once the title is surrendered, the fraudster makes off with what equity the homeowner has built. Even worse, if the title has been surrendered and the new owner falls into foreclosure, the original homeowner will be evicted because they no longer possess a legal claim on the property.
Don't Believe TV Ads
Fraudsters running rescue operations like to advertise with promises of saving homeowners from foreclosure. The Federal Trade Commission (FTC) says that most of these claims violate federal law, because it's a guarantee that cannot be met. The FTC has counted over 200 of these false marketing campaigns in which a 1% interest rate is promised. Homeowners signing on later discover that this is a payment rate, or that they have been offered a quickly expiring incentive.
The Bait And Switch
One of the simpler yet more effective scams is presenting a distressed homeowner with what looks like an application for a new mortgage or refinancing, but is in fact title transfer papers. Once these are signed, the homeowner loses his claim on the home and whatever equity was in it.
When interest rates reset and payments rise, overburdened homeowners stretch to find a way to stay in their homes. Some turn to rent-to-buy schemes, in which fraudsters offer to buy the property with a provision that the homeowner will pay rent while building equity. However, once the title is handed off, the homeowner can be locked out or forced to leave, since they no longer possess a legal claim on the home.
Because the foreclosure process wrecks homeowner credit, refinancing or second mortgages are difficult to obtain. Some fraudulent rescue funds promise to bail out distressed homeowners by secure outside funding with their higher credit score. This happens once the homeowner hands over title of the home.
One of the best ways to know if you're dealing with an illegitimate operation, besides its demanding upfront fees, is whether it promises to be a jack-of-all-trades that can handle the responsibilities that would otherwise fall to your credit counselor, lawyer and lender. The more someone insulates a homeowner from the foreclosure process, the easier it is for them to pull off criminal malfeasance.
Some frauds will promise to resolve credit problems by working with a homeowner's lender. In a way they do accomplish this, but it's not in the homeowner's best interest. After they pocket whatever fee the homeowner pays them, they'll file a bankruptcy case, which homeowners are lead to believe will save their home.
Don't Fear The Lender
Many people turn to foreclosure mediators because they're intimidated by the prospect of calling their lender. Keep in mind here that given the scope of the current foreclosure crisis, every bank has dealt with thousands of foreclosure cases and that it's in the bank's interest to resolve or restructure problematic payment schedules. With the help of a credit counselor and a real estate attorney, you're more likely to stay in your home than with a so-called mediation specialist who promises to save it.