You’ve probably heard the ads on the radio or seen the signs or fliers: Having trouble with your mortgage? We can help! You may be eligible for mortgage aid!

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!

The perfect storm

It’s no accident that the spike in foreclosures has been accompanied by a spike in mortgage scams. Mortgage fraud is at an all-time high — up 26 percent in 2008, according to a recent report by the Mortgage Asset Research Institute, or MARI. Unsurprisingly, the report cites a rise in foreclosure-prevention schemes as a contributing factor.

Steve Tripoli saw the storm on the horizon as well. As a former consumer fraud investigator for the National Consumer Law Center in Boston, Steve 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.

3 types of scams:
  • 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 the 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 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.”

Desperation born of the housing crisis can also make homeowners easy targets for fraud. Dana Simas, a spokeswoman for the California Department of Justice, says several high-profile fraud cases have centered around promises to modify mortgages for behind-the-eightball homeowners. One such case, involving fraudulent ‘counseling service’ First Gov, is typical.

“They took people’s money, they said that they would talk to their lender and modify their loan and get them lower interest rates, lower payments — the works,” says Simas. “They charged an upfront fee, usually ranging about $1500 to $3000, and they told the victim, ‘Don’t talk to your lender, don’t contact your lender, because it will interfere with our renegotiation process.'”

“Obviously, they were just pocketing the money and weren’t providing any services.”

Unfortunately, help for victims caught up in foreclosure-related fraud 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.

In his former position as staff attorney for Clark County Legal Services in Las Vegas, Daniel Ebihara, now a deputy attorney general with the state of Nevada, helped foreclosure victims through a network of real estate attorneys who volunteered their time to help. One of his success stories involved winning a trial on behalf of a young couple who 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 says,”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

States are stepping in, however, on behalf on homeowners. “There is certainly attention being paid to these scams,” says Lauren Saunders, managing attorney of National Consumer Law Center Washington office. “Several states have passed statutes specifically against foreclosure scams.”

The best such law is in Massachusetts, says Saunders. “The attorney general issued an emergency regulation to ban foreclosure rescue scams, prohibiting title transfers that are done for profit.” The regulation does not prohibit title transfers to avoid foreclosure if they are not done for profit, for instance between family members or a nonprofit organization.

With credit tightening up, what should you do if foreclosure seems imminent?

Harvard Law School professor and bankruptcy expert Elizabeth 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, contact your mortgage servicer directly or seek help a mortgage counseling agency.

How can you be sure you’re getting help from a legitimate counselor and not a fraudster?

“There’s a couple of warning signs or ways to identify these unfortunate scam operations,” says Josh Fuhrman, director of counseling for the Homeownership Preservation Foundation, the agency that runs the Homeowners Hope Hotline, (888) 995-HOPE. “The first and easiest way , of course, is that any type of foreclosure advice really should be free. If you’re paying anybody for any advice, you’re likely not dealing with a reputable organization.”

Another sign of a potentially fraudulent “counselor”: high-pressure tactics.

“They have a tendency to push you to act quickly and get them payment in their hand right away,” Fuhrman says. “Foreclosure intervention is a process and it usually takes some time . So, if people are forcing you into action quickly, you may want to make sure you’re checking them out.”

The best way to make sure you’re dealing with an above-board homeowner aid organization, according to Fuhrman, is to “see if they are a HUD-certified organization.”

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 foreclosure scams being taught in get-rich-quick seminars from coast to coast while credit slowly tightens, putting additional pressure on those in the squeeze.

“With the huge increase in foreclosures, we’re also starting to see greater concern with foreclosure scams,” says Diehl.

Warren is just as pessimistic: “It’s like watching a train wreck in slow motion.”

Claes Bell contributed to this report.

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