Foreclosure scammers have a wide variety of modes of operation and no limit to the kinds of people they target. Particular favorites are the elderly and non-English speaking populations, but given the complexities of mortgage lending and foreclosure laws, almost anyone can find himself a victim.
Probably the simplest scam is pulled by the company that claims to be able
to save a house but demands an upfront fee; perhaps one month's
mortgage payment. Once the fee is paid, the company vanishes, content with its
quick and easy if small profit.
A variation on this is to insist that the homeowner make all mortgage payments to the rescuer while he "negotiates" with the mortgage company to resolve the delinquency. He, of course, is doing no such thing and if he is lucky, might collect three or four months worth of payments before the homeowner spots the auctioneer on his front lawn.
Scammers can make a much greater profit by equity stripping; i.e. helping themselves to any home value above and beyond that owed to the mortgage company. One of the oldest versions of equity stripping is hard money lending which, if done correctly is not illegal but isn't real helpful to the homeowner. The lender is more interested in the equity in the property, (he usually looks for less than 50 percent loan to value) than in the owner's ability to repay the loan. The lender pays off the delinquent loan and puts his mortgage in place at close to a usurious rate. The homeowner is now confronting much larger payments than those he was previously unable to meet and he finds his home again in foreclosure.
A variation on this is for the lender to repeatedly bail out the homeowner, each time with a higher loan to cover the lender's "fees and costs" until the homeowner has no equity remaining in the property. The lender can now foreclose without fearing he will have to return any excess proceeds of the sale to the homeowner.
Other schemes are much more complex. The National Consumer Law Center issued a report two years ago entitled "Dreams Foreclosed: The Rampant Theft of Americans' Homes Through Equity-Stripping Foreclosure 'Rescue' Scams" that looked at rip-offs in every state in the union. We culled some examples from that report.
The rescuer approaches a homeowner who may be only hours away from a foreclosure sale and offers a loan. The homeowner assumes he is borrowing money when in fact the documents he signs are an agreement to sell the property and rent it back for a period of time before repurchasing the home, usually well above market value. However, the existing mortgage is not paid off and the rents are used to service the mortgage on a house the victim no longer owns. The rescuer makes it nearly impossible for the victim to exercise his right to repurchase, rents escalate, and the former homeowner, once he misses rent payments, is evicted, leaving the rescuer free to sell the house on the open market.
In California a borrower has 90 days to cure a default and 21 days to stop the foreclosure sale. The approach used by some scammers is to promise a refinancing in order to cure the default but then they fritter away most of that time before informing the homeowner that he does not qualify for a new loan. At that point the solution proposed by the rescuer is to sign over the house so that any foreclosure "will be against the rescuer" rather than the homeowner and, with time and choices dwindling, the homeowner often accepts.
Scammers frequently use "affinity" marketing to lure homeowners - sending African-Americans into Black communities, Spanish speakers to talk with Hispanics, elderly persons to approach the elderly. The idea is that being approached by someone who looks like them or speaks like them will make troubled homeowners more comfortable and trusting.
Another technique is to seal the homeowner off from legitimate help or legal relief. He is advised not to talk with the mortgage company, not to file for bankruptcy, not to seek out recommended credit counseling companies. The rescuer will, he assures the homeowner, handle those details. When it is too late for the homeowner to actually avail himself of real help he has little choice but to let the rescuer cut a deal on his own terms.
In the current economy homeowners have to smarten up. There are some common-sense ways to protect your home and there are some legitimate investors out there who can help out if you absolutely cannot afford to stay in your home. We will talk more about this later in the week.