Foreclosure Rescue Scams Rise as Foreclosure Numbers Soar

By Katalina M. Bianco, J.D., Editor, CCH Federal Banking Law Reporter, CCH Mortgage Compliance Guide and Bank Digest.

With foreclosure rates up 75 percent in 2007 and continuing to escalate, the number of foreclosure rescue scams also are increasing. Recent reports indicate that more than 1 percent of all U.S. households were in some stage of foreclosure during 2007, with 405,000 of those households losing their homes. As these homeowners struggle to prevent losing their homes, they also are facing the challenge of foreclosure rescue scams, which are rising along with foreclosure rates.

Foreclosure Rescue Fraud Lures

Foreclosure rescue firms use a variety of tactics to find homeowners in danger of foreclosure. Some look through public foreclosure notices in newspapers, on the Internet or through public files at local government offices, and then send personalized letters to homeowners. Others lure homeowners through ads on the Internet, on television or in the newspaper, posters on telephone poles, median strips and at bus stops or flyers or business cards at homeowners' homes.

Scam Intervention with Lenders

One type of foreclosure fraud involves scammers who tell homeowners that they can negotiate a deal with their lenders for a fee. Homeowners often are told not to contact their lenders, lawyers or credit counselors but to let the scam artist handle all the details. Once homeowners pay the fee, the fraudster disappears, leaving homeowners to face a foreclosure that may have been prevented with legitimate intervention. In some cases, the scammers require homeowners to sign a written service agreement and pay non-refundable fees upfront only to "negotiate" with lenders by proposing plans that actually raise homeowners' monthly payments, leaving them in a worse financial position than before the intervention. In other cases, the fraudster arranges for homeowners to make their mortgage payments directly to the scammer during negotiation with the lender. The scammer may collect a few months of payments before disappearing.

Lease/Buyback Scams

In a second type of scam, fraudsters promise to intercede with the homeowners' lenders to prevent foreclosure, but they require the homeowners to sign over the deed to their property to the foreclosure relief company. The scammers tell homeowners that they will lease their homes back to the consumers with a buyback option at a future date when the homeowners are financially stable.

Often homeowners who enter into these contracts with the scammers believe that they are getting help catching up on mortgage payments and do not realize that they have sold their homes. The lease payments typically end up to be higher than the mortgage payments. The scammers strip the homes of equity and leave the homeowners facing greater financial stress and eviction from their homes.

In a variation of this scheme, the scam artist raises the rent over time to the point that the former homeowner cannot afford it. After missing several rent payments, the renter is evicted, leaving the scam rescuer free to sell the house.

Combination of Intervention and Lease/Buyback Schemes

In some cases, foreclosure rescue companies will combine both intervention and lease/buyback scams. The foreclosure rescue company will tell homeowners that it will negotiate with their lenders to establish "work out" plans to defer or lower homeowners' mortgage payments. The company claims that if the "work out" plan cannot be negotiated, the company will seek financing from other lenders. After failing to secure this financing, the company tells the homeowners that it will buy their homes and re-sell them to the homeowners through installment contracts. The homeowners "sell" their homes to the company but never receive either "work out" plans or installment contracts, ultimately losing their homes to the company.

Equity Stripping

Fraudsters often employ various methods of equity stripping. Foreclosure rescue companies lead homeowners to believe that the company can save their homes when in reality the homeowners are selling their homes to company employees who strip out the equity and leave homeowners evicted from their homes. After the companies obtain title to the homes, they take out new mortgages that exceed what was owed on the old mortgages without the homeowners' knowledge and pay the homeowners an amount much less than the equity that they had in their homes.

Bankruptcy Foreclosure

In some instances, a fraudulent foreclosure rescue company promises to negotiate with homeowners' lenders or to get refinancing for homeowners, dependant on an upfront fee. However, instead of contacting lenders or arranging refinancing, the scammer takes the fee and files bankruptcy on behalf of homeowners, often without their knowledge. While a bankruptcy filing often stops a home foreclosure, it's generally a temporary solution. The bankruptcy process typically is complicated and expensive. Also, in cases involving homeowners that are unaware a bankruptcy has been filed in their name, failure to attend the first meeting with creditors will cause the bankruptcy judge to dismiss the case. The dismissal resurrects foreclosure proceedings. Not only do homeowners lose their homes, bankruptcy stays on their credit reports for 10 years, making it difficult to obtain credit, buy a home, get life insurance or even get a job.

Red Flags

The Federal Trade Commission has published a list of red flags intended to assist homeowners in avoiding foreclosure rescue scams. According to the agency, if homeowners are seeking foreclosure prevention help, they should avoid any company or business that:

• guarantees to stop the foreclosure process no matter what the circumstances;
• instructs homeowners not to contact their lenders, lawyers or credit or housing counselors;
• collects a fee before providing homeowners with any services;
• accepts payment from homeowners only by cashier's check or wire transfer;
• encourages lease/buyback plans;
• tells homeowners to make their mortgage payments directly to the business or company rather than to their lenders;
• advises homeowners to transfer to the company their property deed or title;
• offers to buy their homes for cash at a fixed price that is not set by the housing market at the time of sale;
• offers to fill out the paperwork for homeowners; and
• pressures homeowners to sign paperwork that they have not had a chance to read thoroughly or that they do not understand.

The FTC advises homeowners who are having trouble paying their mortgages or have gotten a foreclosure notice to contact their lenders immediately and to report foreclosure rescue fraud to the FTC, their state attorney generals and local better business bureaus.

FTC Foreclosure Fraud Complaints Filed

In addition to the FTC's efforts to protect consumers from foreclosure fraud via education and awareness, the agency announced on Feb. 29, 2008, that it has filed two lawsuits charging six individuals and their businesses with falsely claiming that they will stop foreclosure. The agency said that it will seek to bar them from further violations and make them forfeit the money gained through their scams.

In Federal Trade Commission v. Mortgage Foreclosure Solutions, Inc., a Florida corporation, Debra Behrens, and Michael Siani (United States District Court For the Middle District of Florida, Tampa Division), Mortgage Foreclosure Solutions, Inc., Debra Behrens, and Michael Siani are charged with "falsely representing that they will stop foreclosure in all or virtually all instances, in violation of the FTC Act, which prohibits unfair and deceptive acts or practices." According to the FTC's complaint, they allegedly claim that they can stop foreclosure regardless of consumers' hardships or payment histories. Their promotions have appeared on Internet websites and blogs.

Consumers who call a toll-free number are asked questions to determine if they qualify for a workout with their lender and, regardless of their answers, are told that they qualify for a workout plan, the FTC complaint states. The defendants allegedly charge a $950 advance fee and a $250 processing setup charge. After receiving consumers' money, they fail to provide updates about the foreclosure proceedings or return consumers' telephone calls, according to the complaint. Consumers who do reach the defendants allegedly are told that the defendants are working on a solution or that no solution can be found. Many consumers ultimately lose their homes to foreclosure, and others avoid foreclosure only through their own efforts.

In a second case, the defendants, all based in Texas, are National Financial Solutions, LLC, National Hometeam Solutions, LLC, United Financial Solutions, LLC, Nationwide Foreclosure Services, LLC, Evalan Services, LLC, Elant, LLC, Elias H. Taylor aka Eli Taylor, Everard Taylor aka Everardo Taylor, Emanuel Taylor, and Edwin P. Taylor, Sr. aka Ed Taylor. The FTC's complaint charges them with violating the FTC Act by falsely representing that they would stop foreclosure in "all or virtually all instances" and that they would refund most or all fees if foreclosure could not be stopped.

According to the FTC's complaint, the defendants used a variety of company names on Internet websites and in direct mail to make such claims as "We have stopped foreclosures all over the country" and "Special relations we have with many mortgage banks expedite case approvals within 24 hours." In phone calls with consumers, they also claimed that, for an up-front fee ranging from $500 to $1,200, they could stop foreclosures on specific homes and would provide options other than filing for bankruptcy, the complaint stated.

The complaint alleges that the defendants often did not prevent foreclosure for their clients, failing to take promised actions or taking only minimal steps not calculated to prevent foreclosure, and often increased the likelihood of foreclosure by encouraging clients to wait passively for weeks rather than contact the lender themselves and explore possible options. The defendants also allegedly did not honor their promise to refund most or all of their fees in instances where they could not stop foreclosure, resulting in consumers losing both the fees and their homes. the FTC stated in its complaint.

State Attorneys General Fight Fraud

Foreclosure fraud also is being targeted by state Attorneys General across the country. A prime example of state action is in the state of Illinois where Attorney General Lisa Madigan has actively pursued foreclosure fraudsters since 2005, long before public awareness of the crisis arose. In recent news, Madigan announced on Feb. 27, 2008, that her office had reached a settlement agreement with a Charlotte, N.C.-based business operating a foreclosure rescue scheme. According to the Attorney General's Office, HomeSavers USA, Inc. and its CEO, David Moakler, will cease offering and accepting money for foreclosure rescue services in Illinois. Customers of HomeSavers USA have until March 21, 2008, to file a complaint with the AG's office for full or partial refund of the fees they paid to the defendants. The settlement is the result of a complaint that Madigan filed in January 2006 alleging that the company violated the state's Consumer Fraud and Deceptive Business Practices Act by failing to negotiate with lenders on behalf of its customers after falsely promising to do so.

Madigan also drafted the Mortgage Rescue Fraud Act that took effect on Jan. 1, 2007. The legislation made it illegal in Illinois to accept upfront foreclosure rescue fees. Since the law's enactment, Madigan has sued 11 mortgage rescue companies for violating the Act.

A number of other state Attorneys General have successfully pursued lawsuits against foreclosure rescue companies. Some have pending legislation similar to Illinois'. With foreclosure rates sky high in states across the country, state legislators and regulators are actively cautioning homeowners against foreclosure scams and providing guidance on how to avoid scammers and what to do should homeowners find themselves victims of foreclosure scams. State legislators, regulators and community activists are working to educate homeowners on foreclosure fraud, believing that awareness will be a major factor in prevention of future fraud schemes.