Foreclosure Scams

With the rising volume of foreclosures on the market, there was bound to be a number of operators that are perpetuating scams on the market. Some of these scams target the homeowner. Others target the mortgage lender. Almost all of them lead to the same unalterable path: foreclosure.

The question sometimes is merely to what extent a homeowner must beat a dead horse. Although there is a lot of talk in Congress and elsewhere about “loan modification” and the like to help people save their homes, there is a fundamental economic problem that has emerged – people are often way over their heads on the amount of mortgage that they can sustain with their income. All the modifications in the world cannot save the home if the homeowner cannot afford to support the mortgage in the long-term. This simply means that a homeowner must buy what he or she can afford. Only by sheer speculation based on the recent hyper-inflation of home values can a low-income homeowner afford a high-income house. This is really part of the shell game brought to you by a vast industrial complex of mortgage brokers, real estate agents, and banking and loan institutions.

Now, introduced to this mix is the scam operator – helping the person who often cannot afford their home to avoid foreclosure. One method that comes to mind is simply selling the property and retiring the loans. This is all well and good, but with the value of the homes at less than the outstanding mortgage debt, this would not be possible absent a “short-sale.” Here is one scam I have seen lately: a mortgage broker and real estate agent identify people that have listed their property for sale (but are hopelessly upside-down). The scammer mortgage broker/real estate agent finds a buyer to purchase the property at an inflated price over the outstanding balance on the current mortgages. The seller gets a premium out of the escrow for the inflated price and kicks that back to the scamming mortgage broker/real estate agent for making the deal happen. These broker/agents also get a commission on the sale. Buyer now owns a home that they often could not have afforded with new loans outstanding that exceed the value of the property from day one. Ultimately, these properties end up in foreclosure with the new mortgage lender taking the hit. These scams are VERY sophisticated. Not being generally sophisticated in financial matters themselves, most of the buyers and sellers are really unaware that they are participating in a scam – brought to this by actual licensed brokers and agents and just signing where told. Of you course you can trust them!!!! Not.

Here is another scam where there is actually significant equity in the property but the homeowner cannot afford the mortgage payment and foreclosure is imminent. This person is often the kind that benefits the most from a Chapter 13. In a Chapter 13, the homeowner can often get rid of their unsecured debt and focus his/her attention on playing mortgage catch-up and keep it current. If this is out of reach, they might be able to buy some time to market and sale the house and avoid foreclosure and be able to save their equity in their house. However, because they don’t know they can use bankruptcy as a way to preserve their home (or perhaps its equity at least), they fall prey to the scammers. But more about scammers. I suppose there is every trick in the book. In one case I came upon recently, the homeowner got a letter that looked like it came from his foreclosing mortgage lender and asked him to call a number to discuss ways to stop the foreclosure. Before the day was out, the homeowner had DEEDED his property to the scammer with lots of fast talk about a new hard money lender that was going to step in. The poor homeowner simply did not know what hit him. Once these scammers get the deed to a piece of property, they often get a new loan in place (perhaps at an inflated property value), pay off the original foreclosing lender, and then let that new loan default and the property then go to foreclosure. They might even collect rent from the poor scammed homeowner in the meantime. It is very diabolical.

Many schemes are not as complex as those listed above. There are many scammers, who, with a smile and fast talk, simply extract money from the hapless homeowner. They make their profit by collecting mortgage payments or other fees and then do nothing (like paying the foreclosing lender!). The foreclosing lender just finishes the process and the homeowner is up the creek and out of a house. The Federal Trade Commission has published these “Red Flags” and warns people to avoid any business that:

1. guarantees to stop the foreclosure process – no matter what your circumstances;
2. instructs you not to contact your lender, lawyer, or credit or housing counselor;
3. collects a fee before providing you with any services;
4. accepts payment only by cashier’s check or wire transfer;
5. encourages you to lease your home so you can buy it back over time;
6. tells you to make your mortgage payments directly to it, rather than your lender;
7. tells you to transfer your property deed or title to it;
8. offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale;
9. offers to fill out paperwork for you;
10. pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.

There may be opportunities outside of the bankruptcy context to save a home from foreclosure. The goal is to identify those opportunities and not fall victim to scam artists. However, many people just get deep and deeper in unsecured debt while they pay money on mortgages that are simply too much in every sense (too much interest, too much monthly payment, too much principal balance). Loan modifications may not ultimately help the homeowner when unsecured creditors are now suing to enforce their own debt and putting liens on a house. A bankruptcy may be the order of the day for these situations – helping the homeowner to discharge their unsecured debt while focusing their income and energy into preserving their home.

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