Mortgage modification is an alternative to foreclosure -- the lender reworks the terms of an existing home for a period of time. The effort is designed to reduce the monthly payment so the home is more affordable for the owner. Lenders may lower interest rates, extend loan terms, reduce principal balances or use any combination of those approaches.
Modification Scam Growth
Both state and federal governments are enforcing new laws to make loan modifications more transparent and to give consumers more protection against scams. Non-profits, consumer advocates and community and housing groups have also mounted mass outreach efforts to educate the public about mortgage modification fraud.
Sadly, the problem persists as scammers use more sophisticated and elaborate ploys to separate money from homeowners made vulnerable by the stress of missing mortgage payments. NeighborWorks America, for example, through its Loan Modification Scam Alert Web site, has tracked loan modification fraud complaints for the past four years. Since the Scam Alert web site debuted four years ago, 35,000 homeowners have filed complaints, with 6,000 of those complaints filed in the first six months of 2013.
Barbara Floyd Jones, a NeighborWorks program manager, says it also costs more to get taken to the cleaners.In 2009, homeowners looking for modifications were robbed of an average of $1,000 to $1,500. Today the typical rip-off averages $4,000 to $5,000. A growing number of individual losses amount to tens of thousands of dollars, according to Floyd Jones.
The Loan Modification Scam Alert says there are nearly a dozen common scams targeting struggling homeowners.
Mortgage Modification Scams Today
Foreclosure Rescue Scam - The scam artist poses as a counselor and tells you he or she can negotiate a deal with your lender to modify your loan or save your house - if you pay a fee first. Once you pay the fee the scammer vanishes with your money.
Any mortgage assistance program - mortgage modification, foreclosure help, short sale assistance, etc. - that requests an upfront fee is likely violating federal or states' laws or both, which prohibit upfront payments. The exception is that licensed attorneys are allowed to collect retainers upfront.
"Government" Modification Program Sham - These frauds masquerade as government operations, have official sounding names and web sites and use real government program acronyms like "HAMP" and "HARP" to reel you in. They also ask for steep up-front fees they'll be happy to make disappear.
Forensic Loan Audit Grift - Grifters calling themselves forensic or mortgage loan "auditors" offer to review your mortgage documents to determine if your lender violated mortgage regulations. If so you might be able to use the report to thwart action from your lender. While a legitimate audit uncovering real violations can accomplish this, many "auditors" are neither qualified or inclined to perform the work. They just disappear with your money.
Mass Joinder Lawsuit Scheme - An attorney, law firm or marketing partner will hand you a line that a class action-type suit against the lender will stop a foreclosure, reduce your loan balance or interest rate, get you monetary damages, or even give you your home free and clear.
In real mass joinder lawsuits, lawyers are paid on a contingency basis, but only after the case is over and won. The scammers will tell you you can't participate until you ante up some cash.
Bait-and-Switchers - These swindlers try to convince you to sign documents for a loan modification that will bring your existing mortgage current. What you actually sign are documents surrendering your home's title or deed over to the crooks.
Rent-to-Own or Leaseback Scheme - Once you've been cajoled into surrendering the deed of our home, you get to stay in the home as a renter and buy in back in a few years - or so the story goes. The terms of the deal make buying back your home impossible. The scammer might collect rent from you but may not make the mortgage payments. The lender eventually takes back the house.
Short Sale Ploy - So called "short sale negotiators" promise to expedite a short sale, provided you pay a fee. Your money is likely to get expedited right out of your wallet, while no real services are performed. Short sale negotiators or facilitators may even engage in flipping fraud, bring in straw buyers, or turn you over to a real estate broker and collect a referral fee. In most states, only licensed real estate agents or attorneys can legally represent you in a short sale.
Bankruptcy Gambit - In this game, the scammer also promises to negotiate with your lender or get refinancing on your behalf, if you pay a fee up front. Instead of contacting any lender, he or she pockets your fee and opens a bankruptcy case in your name.
That will temporarily stop the lender from coming after you and your home. However, once your bankruptcy goes before a court or trustee, the lender can resume pursuit of the debt or foreclose if you don't pay. Meanwhile, you've not only lost money on the deal, but you have to extricate yourself from a bankruptcy filing you didn't wish to file.
Avoiding scams boils down to the same principles every time. Deal only with your lender, a real estate agent you trust, or a licensed attorney. Or contact the U.S. Department of Housing and Urban Development (HUD) or affiliated agencies for free mortgage assistance. Understand that any scheme that can only be pulled off by hiding something from someone is probably illegal. Finally, avoid deals that sound unbelievable -- there is no free house.