Unsophisticated borrowers who are delinquent on their mortgages are being preyed upon by scam artists that offer the promise of relief and the reality of foreclosure.
Those were findings in The Rampant Theft of Americans' Homes Through Equity-Stripping Foreclosure "Rescue" Scams, a study authored by Steve Tripoli and Elizabeth Renuart of the National Consumer Law Center.
Foreclosure "rescue" scams have proliferated by lenders' "increasingly reckless extension of credit," "predatory lending" and weak support from the states for troubled borrowers, the center said.
"It's at the intersection of this new array of pressures and surging home values that foreclosure 'rescue' scams find their opening," the authors said.
The scams revolve around heavily promoted deals that usually end up either draining out the property's built-up equity or leaving the "rescuer" owning the house outright.
One "rescue" firm in California alone reportedly has 1,800 clients in that state.
Scam artists develop a sense of trust between the supposed rescuer and borrower, and play on the borrowers' own desperation and lack of economic sophistication, according to the study. The perpetrators keep the borrower in the dark about the foreclosure process, its deadlines, legal rights, and low-cost alternatives that can save the home.
Several states have claimed that "rescue" scams in predominantly minority neighborhoods increasingly have involvement by local clergy, the study said.
"Phantom help" is reportedly one of three predominant forms in which borrowers are stripped of their homes. In this scheme, the "rescuer" charges outrageous fees either for light-duty phone calls and paperwork the borrower could have easily performed, or on a promise of more robust representation that never materializes. The "rescuer" essentially abandons the homeowner, leaving the borrower without sufficient assistance or little or no time to save the home from being foreclosed.
A second common scam is the "bailout" in which borrowers surrender the titles to their homes in belief that they'll be able to remain as renters and buy the homes back over the next few years, according to the report. Borrowers fall prey to this scam by being told that surrendering title is necessary so someone with a better credit rating can secure new financing to prevent loss of the home, but the terms of these deals are so burdensome the buyback becomes impossible, and borrowers end up permanently losing their home while the "rescuers" walk off with all or most of the home's equity.
In Boston, attorneys at Harvard Law School's Predatory Lending/Foreclosure Prevention Clinic have tracked the activities of a foreclosure "rescue" firm, filing two suits from at least 40 transactions it has found the firm has performed in several Massachusetts counties alone, the report said.
In one case, the firm allegedly provided about $22,500 in "real" money to a family to bring their mortgage current. This, in exchange for turning ownership of their home over to a "trust," which then required them to pay back approximately $52,000 at the end of two years, plus five percent of any increased equity in the property, in order to recover ownership. Documents, however, reflected a cash advance of about $35,000 as fees were charged in connection with the transaction -- "another way of sucking equity out of the home" -- including a documentation fee and facilitation fee each of $2,500 and a contingency fund fee of nearly $7,000, the report said.
The third prevalent form of rescue scam is a bait-and-switch where the borrower does not realize he or she is surrendering ownership of the house in exchange for a "rescue." Borrowers sometimes believed they were signing documents for a new loan to make the mortgage current, others are gulled by having their home transferred for a ridiculously small fraction of its actual value. In a substantial number of cases, fraud and forgeries of deeds occur and in many cases the original homeowner is left holding the original mortgage on the home he or she no longer owns, the study said.
Foreclosure "rescuers" identify distressed homeowners through public foreclosure notices in newspapers or at government offices. Then, they contact the borrowers, by phone, personal visit, card or flyer left at the door, or advertising and frequently include a "time is of the essence" theme to add a sense of urgency to what is already a stressful and possibly desperate situation for borrowers, the study noted.
"Rescuers" stress the promise of a "fresh start," feature "testimonials" from other homeowners who have been supposedly saved to entice borrowers, who are also frequently instructed to cease all contact with lawyers or their lender and let the "rescuer" handle all negotiations, which "simultaneously cuts off access to possible re-financing options while running out the clock on ways to prevent the foreclosure," the authors said.
Once it's too late to save the home the property is either taken by the "rescuer" or, having been drained of substantial equity through the "rescuer's" imposition of heavy fees and other charges, simply lost to foreclosure.
The authors recommended for states to toughen their laws, by limiting amount of fees and interest that a foreclosure consultant can receive and prohibit the payment of any fees or interest until all services are performed, among other things.