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Foreclosure
scams
By Jay MacDonald ·
Bankrate.com
You see the DayGlo
signs everywhere these days: We buy houses! Cash for your home! Fast
refi now!
Chances are, you
mentally filed these come-ons under good old-fashioned American
entrepreneurship in action. Maybe you even think kindly toward
companies that would offer a hand to debt-ridden homeowners on the
brink of foreclosure.
Fat chance. The majority of these so-called foreclosure "rescuers" are
actually sleazy predators, says Harvard Law School professor and
bankruptcy expert Elizabeth Warren. She calls what they offer "the
cement life jacket."
Before you're even aware of it, these scam
artists will have acquired your home for a fraction of what it would
have brought at sale. Or, in an even worse scenario, they will have
transferred your title into a trust that then enables them to rent
or "resell" your property to equally hoodwinked buyers while, to
your surprise, you remain legally obligated to make the mortgage
payments!
Foreclosure "rescue" scams are nothing new.
What is new is the historic convergence of economic and political
forces that Warren says may soon bring about a
home-equity version of the stock market crash of 1929. She blames
loose credit, lending deregulation and a Fed-supported campaign
encouraging Americans to tap their home equity for bringing us to
the precipice.
"In 1929, you could borrow money to buy stock,
and then use that stock to buy more stock. At that point, the stock
market became overinflated and it
crashed," she says. "Much of the same thing is going on now, only
instead of stocks, it's home
equity."
Take a closer look at these
foreclosure "rescuers" and you'll soon see those DayGlo come-ons for what they really are:
warning signs of the bubble burst to
come.
What the sharks
smell
Like
sharks and blood, scam artists always smell money. And in
America, we've been
pouring our money into our homes since the tech-stock collapse gave
us a renewed awareness of our risk tolerance. Homes were safe. Homes
were real. And, partly fueled by this renewed demand, real estate
suddenly became the investment of choice for stock-weary working
folks, making them vulnerable to scams and scam
artists.
Financial institutions capitalized on the sea
change by loosening credit. You can buy a home, maybe two! Can you
really afford not to? And, just so you can continue to live the
lifestyle you've become accustomed to, they offered an unprecedented
number of ways to strip that equity through lines of credit, home
equity loans and cash-out refis. The Fed
cooperated by keeping interest rates at historic
lows.
Our homes suddenly started to look like, well,
stocks -- with one big catch.
"All you're doing when you take out
a second mortgage on your house is borrowing more money," says
Warren. "If you take out equity, it
isn't like selling off part of your stock portfolio. You can't sell
off two of your bedrooms. You can't say, 'Boy, this market is at its
peak, let's sell the
backyard."
Welcome to what Warren calls
"the middle-class squeeze." Rising costs of health care, housing and
education, combined with increased job uncertainty, income
volatility and eroding salary levels, have placed America's piggy
banks -- its homes -- at a financial risk like never
before.
According to Warren, the overinflated real estate bubble is not only
"unmistakable," but when it bursts, its
effects are going to be widespread. Remember Econ 101: When supply
exceeds demand, prices plummet.
"A quarter of all homes now are
owned by investors," she says. "We are seeing those investors pull
out of the home market, and no market can sustain losing 25 percent
of its participants."
The perfect
storm
Steve Tripoli hears the not-so-distant thunder,
too. As consumer fraud investigator for the National Consumer Law
Center in Boston, Tripoli interviewed numerous state attorneys
general and legal aid staffers for the NCLC's June 2005 report, "Dreams Foreclosed:
The Rampant
Theft of Americans' Homes through
Equity-Stripping Foreclosure 'Rescue' Scams." Tripoli found that foreclosure "rescue" scams fall
into three main categories:
*Phantom help: The "rescuer" charges outrageous fees for
light-duty phone calls or paperwork
that the homeowner could easily do, none of which
results in saving the home. This predatory
scam gives homeowners a false sense of hope and
prevents them from seeking qualified help.
*The bailout: In this scam, the homeowner is deceived into
signing over title with the belief that he will be able to remain in
the house as a renter and eventually buy it back over time. The
terms of these scams are so onerous that the buy-back becomes
impossible, the homeowner loses possession, and the "rescuer" walks
off with most or all of the equity.
*The
bait-and-switch:
In this scam, the homeowners think they are signing documents to
bring the mortgage current, but instead actually surrender their
ownership. They usually don't even know they've been scammed until
they're evicted.
"Rescuers" often place ownership of the
property into a trust in the owner's name in order to avoid the
"due-on-sale" clause in most mortgage contracts. They then transfer
ownership through the trust to themselves or to a front operation.
In these instances, the mortgage company is unaware that anything is
amiss; the homeowner, however, is frequently left on the
hook to pay the mortgage on a house she no longer
owns.
Why do homeowners fall for these scams?
Tripoli blames both the failure of lenders to adequately spell out
the foreclosure terms, time frame and owners' rights, and the
hesitancy of homeowners facing foreclosure to talk about it. That
silence you hear is the deafening silence of
shame.
"The consumer makes rushed judgments that are
not good judgments. They get entangled in this and they think that
what happened to them is just the way it works," he says. "Americans
have the really admirable quality that they want to take
responsibility for their own lives. They are too willing to take too
much responsibility at times and take too much of the
blame."
Unfortunately, help is becoming harder to find.
Even if someone in foreclosure could afford to hire an attorney,
fewer and fewer lawyers are inclined to take cases against scammers
because the prospect of ever collecting a court award is extremely
slim.
Daniel Ebihara, staff
attorney for Clark County Legal Services in Las Vegas, helps
foreclosure-scam victims by tapping into a network of real estate
attorneys who volunteer their time to help. He recently won a trial
on behalf of a young couple that thought they had sold their home to
fend off foreclosure, until they went to buy a car and found that
the 30-year mortgage was still
theirs.
Sometimes scammers are far from
strangers.
"This doesn't just happen with 'rescue'
companies," Ebihara says. "We also see the
elderly being taken advantage of by their own children, where they
come in and say, 'We'll help you out. Just put us on the mortgage and we'll take care of you for
the rest of your life.' As soon as the papers are signed, the kids
are kicking their own parents out on the street. It's
horrible."
With fewer places to turn, more homeowners are
falling prey to the wolves that are literally at their
door.
Tripoli agrees: "When you marry
deregulation and the erosion of consumer protection to what's going
on with consumer debt today, when you put consumers in this crunch
and then you strip all their protection, you get a perfect storm.
It's not a huge, huge number of Americans, it's not a majority, but
it's a much bigger number than we've seen in the
past."
Shelter from the
storm
With credit tightening
up, what should you do if foreclosure seems
imminent?
Warren says if there is time, by
all means refinance out of your zero-interest or adjustable-rate
mortgage into a fixed-rate mortgage. "Even if it costs a little
more, there will be a point in the future when you will thank every
lucky star you have that you did it," she
says.
If you've received a foreclosure notice,
contrary to what the scammers would have you believe, contact your
mortgage company first. There are many remedies available, including
renegotiating the terms of your mortgage, that can save your home or
failing that, allow you to walk away with most of your
equity.
If you can't refinance, renegotiate or sell
quickly, it may make sense to look at filing for
bankruptcy.
"You're looking at a population that fears
or loathes bankruptcy, and understandably. But it may be a more
reasonable option instead of carrying on and maintaining a debt that
you may still be obligated to pay," says Ebihara.
Benjamin Diehl, deputy attorney general for the
state of California, admits that even his state's anti-foreclosure
scam statute, the toughest in the nation, struggles, for want of
enforcement.
"You could impose additional licensing fees,
but if it's a crook, they're just going to operate without a
license," he says. "What it's going to take is not necessarily extra
regulatory hurdles or extra licensing requirements, but
crackdowns."
Like Warren, Diehl is worried. He's seen
the foreclosure scam being taught in get-rich-quick seminars from
coast to coast while credit slowly tightens, putting additional
pressure on those in the squeeze.
"I'm actually kind of scared because, if the
supposed bubble is, in fact, a bubble and it does burst to where you
have a bunch of people with their ARMs and
their interest-only loan and no ability to refi, and those loans go into foreclosure, the
thieves will come out of the woodwork. If it is a bubble and the
interest-only loans come back to bite people, it's only just begun,"
says Diehl.
Warren is just as pessimistic: "It's like watching a
train wreck in slow motion."
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