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.
Foreclosure Scams Lurking In Your Neighborhood
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."
Bad-News Bailouts
Low-level schemes involve those who pose as mediation specialists or counselors promising to rescue homes from foreclosure. Naturally, they work for a fee. While they might not charge an excessive amount of money, between $300 and $6,670, according to the Illinois state's attorney's office, the Federal Trade Commission says that once homeowners pay that first check, these so-called specialists disappear.
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.