Homeowners trying to avoid foreclosure are stressed and scared. They have become a prime target of con artists who prey on vulnerable people. Nonprofit organizations and government agencies are working together to warn consumers of the danger of mortgage relief scams and how to avoid them.
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Many mortgage scammers have been arrested, but plenty more are trying to take advantage of homeowners' financial woes. Here are some examples of common mortgage relief scams.
Scammers posing as official counselors
Several Florida men were arrested in August 2011 and charged with defrauding homeowners under the name of a company called Home Owners Protection Economics Inc., or HOPE, meant to mimic the name of HOPE NOW, a public-private alliance of lenders, nonprofit housing counselors and other mortgage-industry participants. The scammers claimed to be connected with the homeowners' lenders or said they had already been approved for a loan modification under the Home Affordable Modification Program, or HAMP. They demanded an upfront fee for their services.
"Last year, a couple came up to me at a homeowners assistance event and told me they had paid what they thought was HOPE NOW $4,000 to help them with a loan modification," says Faith Schwartz, executive director of HOPE NOW. "The scammers had taken our (HOPE NOW's) documents and letters and reproduced them so they looked legitimate and used HOPENOWModificationsLLC.com as their website."
Many scammers use similar names to government and nonprofit programs and even add their logos to their materials.
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To avoid being caught by one of these scams, "homeowners should find a legitimate, free (Housing and Urban Development)-approved housing counselor by going to HUD.gov," says Christy Romero, special inspector general for the Troubled Asset Relief Program. "It's important to realize that housing counseling is free."
Offering to perform a mortgage audit
The Federal Trade Commission filed a complaint against Sameer Lakhany of Santa Ana, Calif., and companies he controlled, including the Precision Law Center, for charging homeowners for a "forensic loan audit."
Reilly Dolan, assistant director for financial practices for the FTC, says, "A salesperson would call the homeowners and say they were going to audit their mortgage documents and use the violations they could find to force their lender to approve a loan modification. The scammers would tell people that they found violations 90% of the time."
Dolan says these types of scams typically ask for $1,000 to $5,000 from the homeowners, with an average fee of $3,000.
Precision Law Center employees claimed to be HUD-approved housing counselors with qualifications to do the loan audits, which they said would be the only part of the process that wasn't free.
The FTC says that more than $1 million was collected by the Precision Law Center.
Barbara Floyd Jones, program manager for foreclosure prevention efforts for NeighborWorks America, says the paperwork for a loan audit can look legitimate, but she says consumers can avoid scams by proactively contacting a local HUD-approved housing counselor through the HUD website.
Howard Shmuckler, owner of The Shmuckler Group in Vienna, Va., collected almost $2.8 million from struggling homeowners by promising them he could guarantee a loan modification under the Home Affordable Modification Program. He told these homeowners to stop making their mortgage payments and to avoid contact with their lenders.
"Every mortgage relief scam is horrible, and Howard Shmuckler's scam was devastating for his victims," Romero says. "Victims of these scams not only lose a lot of money, but they lose the time when they could have been working directly with HAMP to save their homes. A lot of scammers tell people they can guarantee a loan modification or guarantee that they can stop a foreclosure, but unfortunately a guarantee is never possible."
Some of Shmuckler's victims might have been able to modify their mortgages under HAMP if they had not become so far behind on the mortgage by following Shmuckler's advice.
Shmuckler charged for his nonexistent services. Jones warns that some scammers, knowing consumers have been warned against paying an upfront fee, now wait until a second or third meeting before requesting a fee.
Homeowners should never pay a fee for loan modification assistance. Government and nonprofit housing counselors provide this service for free.
Advising you to stop contacting your lender
In March 2012, three scammers were arrested on charges of committing fraud against California homeowners. They were Gregory and Cynthia Flahive, ex-spouses and co-owners of Flahive Law Corporation, and the firm's managing attorney, Mike Johnson.
In addition to requiring upfront fees in exchange for loan modification assistance, the Flahives told one homeowner to reject his lender's offer of a loan modification. They told that homeowner that they could get a better deal. Instead, the home was lost to foreclosure within four months.
"Be wary of anyone who tells you to stop paying your lender or who tells you to stop trying to contact your lender," Dolan says. "Don't trust someone who says they will talk to your lender on your behalf. Always talk to your servicer directly."
Misrepresented attorneys general settlement
"The attorneys general settlement with the five largest mortgage lenders brought out a new group of people who call homeowners and tell them they represent the lender," Jones says. "They will request $500 or more to facilitate the homeowners getting money from the settlement."
Another common scam is for homeowners to be told that a caller is from a government agency with information about the mortgage settlement. The caller requests a bank routing number or other personal information to "facilitate the refund," but then the scammers drain the bank account.
Schwartz says, "People are always looking for fresh ways to get homeowners' money. One of the newest is for a scammer to tell the homeowner they will put their money in an escrow account and hold it during the loan modification process. Once the money is in the account, they drain it and disappear."
To avoid this scam, never give out personal financial information to anyone who calls. And don't pay a fee for housing counseling.
Mass joinder scam
Jones says fake and even legitimate law firms send notices to homeowners, including some who are not in financial distress, that claim the homeowners have been wronged by their lenders and may be eligible for restitution.
"The homeowners are told to pay $2,000 or more to become part of the lawsuit, but no one should ever pay to be part of a class-action suit," says Jones.
Dolan says the Precision Law Center participated in a mass joinder scam, in which borrowers are invited to file separate lawsuits but share legal fees.
"Generally, these kinds of scams get 1,000 homeowners or more, each paying an average of $3,000," says Dolan. "Sometimes an actual lawsuit is filed on the homeowner's behalf, but usually the suits are kicked out of court immediately for lack of evidence."
Never pay a fee to become part of a class-action lawsuit. Anyone who guarantees a loan modification from your lender or guarantees that a foreclosure can be prevented cannot be telling the truth.
Reporting a scam
If you believe you are the victim of a mortgage relief scam, you can contact one of the following agencies to report it.
FTC.gov or call (877) 382-4357.
PreventLoanScams.org or call (866) 459-2162.
HOPENOW.com or (888) 995-4673.
Sigtarp.gov/contact_hotline.shtml#theform or call (877) 744-2009.
While it is important to report a possible scam, Schwartz also says homeowners must be careful to tell their servicers immediately, too.
"If the homeowners have listened to a scammer and not paid their mortgage or have avoided communication with their lender, they need to get in touch as soon as possible to prevent foreclosure if it is still possible," Schwartz says.
Unfortunately, for some homeowners, it will be too late to stop the foreclosure process.