Industry News

Con artists circle over homeowners on the edge

By Noelle Knox, USA TODAY

At the Legal Assistance Foundation of Metropolitan Chicago, the phone calls come nearly every day from yet another financially desperate homeowner who's become the victim of a "foreclosure rescue" scam.
" This has become the No. 1 problem in terms of calls we're getting and cases we're filing," says Daniel Lindsey, supervising attorney for the foundation's Home Ownership Preservation Project.

And it's clearly a nationwide problem that's likely to get worse. The Better Business Bureau has received complaints from every state and has issued an alert to warn consumers to be cautious about foreclosure-rescue companies.

Alarmed that con artists are taking advantage of vulnerable homeowners, many of whom are buckling under predatory loans, state regulators are cracking down. So far this year, six states have imposed rules against these companies, and six more states have proposed legislation. (Graphic, next page.)

More than 2.2 million Americans are in default on their mortgages. And that figure is expected to grow sharply through next year as 2 million more homeowners with adjustable-rate loans face higher payments. In Ohio, whose foreclosure rate is second-worst in the nation, after Michigan, Attorney General Marc Dann has received hundreds of complaints from all over the state.

"The sad part about this particular offense," Dann says, "is that (the homeowners) lose everything. You lose the little bit of money they had squirreled away, you lose your house and you lose your hope. How do you quantify that?"

In a sweep in August, Dann filed complaints against six companies, including American Housing Authority and Foreclosure Assistance Solutions, and he says he expects to bring a half-dozen more cases in the next few weeks. Phone numbers for the companies were not available.

Regulators and law enforcement in many states are targeting the two most common forms of foreclosure rescue scams: "equity skimming" and bogus or fruitless consulting services.

The first scam works like this: A company offers to take legal ownership of the home temporarily. The homeowners pay "rent" to the company, which promises to return legal ownership to them once they regain their financial footing.

But all too often, con artists borrow as much as they can against the equity in the house — and collect the rent from the original homeowners but never make any mortgage payments. In the end, the property still goes into foreclosure, and any equity the homeowner had built up is gone. Their financial ruin is complete.

The second-most-common foreclosure-rescue pitch goes like this: A company offers to renegotiate the homeowners' mortgage with the lender or help refinance the property. In exchange, they charge an up-front fee, typically $800 to $1,200.

Frequently, though, the company never contacts the lender, or knows the borrower can't qualify for another loan. What little extra cash the homeowner could have used to pay the mortgage or move to an apartment has been wiped out by worthless "services."

There are, of course, hundreds of reputable groups that provide legitimate services for homeowners in trouble. The Department of Housing and Urban Development has certified 2,300 counseling agencies to help homeowners nationwide (www.hud.gov).

HUD and the mortgage industry also support the Homeownership Preservation Foundation, which operates a toll-free counseling hotline, 24 hours a day (888-995-HOPE). Last month, it fielded 22,000 calls from homeowners in financial distress.

When scary letters start piling up

A family that's more than two months behind on a mortgage will often come home to a mailbox stuffed with brightly colored envelopes and postcards from companies promising to help them save their homes.

One such postcard that Steve and Dawn Reyes received after Steve lost his job as a carpenter was from Mortgage Assistance Solutions, a Florida-based company that's known by its customers as Fresh Start.

"YOU WILL LOSE YOUR HOUSE IF YOU DON'T CALL US NOW!!!" the postcard said.

When Dawn called, the company promised to refund its $1,200 upfront fee if it couldn't help them. A month after they signed up, the Reyeses received a summons stating that their house was scheduled for auction on Dec. 12 of last year.

"I called the guy at Fresh Start, and I'm frantic," recalls Dawn, 27, a stay-at-home mom and first-time homeowner in Machesney Park, Ill. "I said, 'Look, I got this summons to go to court; I thought you were talking to the bank.' "

The reply, she says, was: "Yeah, we're talking with them. I'll call them and put a stop to them. We get a lot of calls like this. It's just a scare tactic; nothing's going to happen."

The Reyeses had signed a document in November of 2006 giving Mortgage Assistance Solutions permission to negotiate with the family's lender. But the Illinois Attorney General's office, which filed a lawsuit against Mortgage Assistance Solutions two months ago, told Dawn that their lender didn't receive that document by fax until Dec. 14 — two days after Dawn received the summons, and called them.

Angry, Dawn demanded her family's money back. Mortgage Assistance Solutions sent her $700 and said it was entitled to the remaining $500 because of the time it spent on her case.

Yet soon after Dawn canceled the services, she says, she received another green-and-white envelope in the mail from Fresh Start. It read: "FORECLOSURE COMPLAINT NOTICE. Your House Is Scheduled To Be Sold At Auction. National Bank."

Michael Stoller, a Los Angeles attorney and owner of Mortgage Assistance Solutions, says, the Reyeses were "denied a repayment plan because of insufficient income and lack of supporting documentation." The family wasn't entitled to a full refund, Stoller explains, because the company charges $150 an hour for time spent negotiating with the lender.

When USA TODAY told Stoller that a non-profit counselor was able to help the Reyeses obtain a new fixed-rate loan with a much lower interest rate in June, he suggested that lenders are more willing to modify delinquent loans to help an owner stay in a home than they were before.

Mortgage Assistance Solutions, Stoller says, has handled more than 6,000 cases this year and refunded $1.1 million this year to homeowners it couldn't help. "That's not a company that takes money from customers and runs away," he says. "Our goal was always to help homeowners."

Still, Stoller says his company is winding down its operations and will stop doing business by early next year, because of increased regulation and competition.

Marilyn Libby, 55, a nursing assistant, says Mortgage Assistance Solutions helped her modify her subprime loan with her lender. She says she feared she "was getting the shaft" from the company, because she had received few updates about her loan and was getting threatening letters from her lender to foreclose on her home in Stout, Ohio.

Libby obtained a lower fixed-rate loan last week, and afterward, she says, "I called Fresh Start and said: 'Thank you, thank you. I can sleep now.' "

But Bob Campbell, executive director of the Rockford Area Affordable Housing Coalition, the non-profit counseling service that helped the Reyeses, says: "I've got a file sitting here on Fresh Start. We sent quite a few names to the (state) attorney general because that was a name we kept running into."

The Better Business Bureau says it's received 106 complaints nationwide against Mortgage Assistance Solutions in the past year.

Preying on the victimized

Two months ago, Massachusetts Attorney General Martha Coakley permanently banned foreclosure-assistance companies from taking title of homes and then renting them back to their cash-strapped owners. She's also filed lawsuits against the people operating three such companies.

Consumer complaints about such scams have spiked this year, and she says she expects that trend to continue for the next year or two.

What's most heart-wrenching, Coakley says, is that many victims of foreclosure-rescue scams had already been cheated by predatory lenders.

Those predators, she says, persuaded the victims to take out loans with unfavorable terms, knowing the borrowers probably couldn't afford the payments they'd face once their introductory "teaser" rate reset to a much higher rate.

"We saw this as an egregious problem at the end of a bad process," Coakley says. "We saw people in trouble, in foreclosure, and it appeared to my folks that this was really, in that sense not serious in terms of impact but in terms of perdition. People were coming in to pick at the carrion."

Why people get behind

The most common reasons that lead people to fall behind on their mortgages are job or income loss, health problems or a death in the family. Yet fear, shame or distrust of their lenders keeps about half of borrowers from calling those lenders, according to Freddie Mac.

That communication gap can leave homeowners vulnerable to fast-talking con artists who buy mailing lists of homeowners in default or slap their business ads on telephone poles.

Back at the Legal Assistance Foundation of Metropolitan Chicago, Lindsey says the saddest stories he hears are from retirees who have lost the only home they've ever owned, thanks to a foreclosure "rescue" fraud.

"That property is their entire life, most of their wealth, they've raised their children there, they are completely emotionally invested in it, and that's exactly the last thing they want to lose," he says. "The vulnerability they are experiencing gets exploited by these 'rescuers.' "