Foreclosure “rescue” scammers steal your home, equity, and money. Here’s how to protect yourself.

As record numbers of homeowners are defaulting on mortgages and are at risk of foreclosure, foreclosure rescue scammers are coming out of the woodwork in droves. These people and companies pretend to help homeowners facing foreclosure, but instead steal homes, equity, and money — leaving the former homeowner in a more desperate financial state than before.

Don’t become the latest victim of these scams. Learn how the scams work, what the scammers are like, and how to protect yourself.

More Foreclosures Bring More “Rescue” Scams

Due to the current credit crunch and less-than-careful lending practices by banks, more people are having trouble paying their mortgage. And because the housing market is in a slump, it’s harder for homeowners in financial distress to sell their home (the sale price often doesn’t cover the mortgage) or refinance on better terms. The result is a dramatic increase in the number of people facing foreclosure.

Enter the scammers. Foreclosure “rescue” is rampant for some very good reasons:

• There are lots of potential victims.
• It’s easy to find victims because the notice of default is public record (the lender must record the notice of default with the county recorder), and nowadays this information is often computerized.
• People are desperate.
• Usually, a lot of money is at stake.

How Do the Scams Work?

The methods scammers use to rip off homeowners are extremely varied. But most of them fit into three broad categories.

1. Sale-Leaseback Scams

In these schemes, foreclosure scammers prey upon the overarching desire of many homeowners — to stay in their home. The foreclosure scammer tells the victim that the scammer will buy the house so that the mortgage is up to date and the homeowner can rent the home indefinitely and then buy the home back from the scammer. Unfortunately, the rent payments and buyback provisions are usually so onerous that homeowners can never buy the home back.

2. Charging High Fees for Little or No Services

Some foreclosure scammers pretend they are legitimate foreclosure consultants (to learn more about legitimate consultants, see “Protect Yourself: How to Avoid Foreclosure Scams,” below) and then exploit the homeowner’s trust by:

• charging exorbitant fees for services the homeowner could easily have performed himself
• charging fees for services they never perform, or
• taking steps that hurt the homeowner.

These schemes cause the homeowner to lose much-needed money. Worse, because the homeowner believes the foreclosure “consultant” is handling the situation, the homeowner does nothing during the crucial time period when action must be taken. By the time the homeowner realizes he has been scammed, it is too late to get current on the loan, negotiate with the lender, sell the house, or find effective assistance.

3. Stealing the Home Without the Homeowner’s Knowledge

In these schemes, the foreclosure scammer gets the homeowner to unwittingly surrender ownership of the home. Often, the foreclosure consultant promises that he will bring the mortgage up to date and allow the homeowner to stay in the home, setting up a payment plan for the homeowner to pay him back. The victim doesn’t realize that the home has actually been sold to the scammer (usually at a ridiculously low price) and ends up paying extremely high rent to stay in the home.

Sometimes, the homeowner believes she is merely signing new loan documents to bring the mortgage current, but instead is signing title over to the scammer. Or the scammer may simply forge the homeowners’ signature on documents.

Profile of a Scammer: What to Look For

The people and companies that prey upon homeowners in foreclosure use many tactics to gain the homeowner’s trust. Here are some examples:

• The scammer contacts you by telephone, mail, or even knocks on your door (legitimate foreclosure consultants don’t seek you out, you must go to them).
• The scammer is smooth-talking and preys upon your desperation.
• He provides little or no information about the foreclosure process.
• Many scammers claim government affiliation.
• They often use “affinity marketing” — Spanish-speakers marketing to Spanish-speakers, Christians to Christians, senior citizens to senior citizens, and so on.
• Some offer “testimonials” from other customers.
• They claim the process will be quick and easy (dealing with foreclosure is never quick and easy) and use messages such as: “Stop foreclosure with just one phone call” or “I’d like to $ buy $ your house” or “Do you need instant debt relief and CASH?”
• They tell the homeowner to cease all contact with the mortgage lender.

Protect Yourself: How to Avoid Foreclosure Scams

If you are having financial troubles, believe you may lose your home, or are in foreclosure, here’s how you can make sure that you do not become a victim of a foreclosure scam.

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Challenge a foreclosure by bringing a defense such as unconscionability or lender mistake.

Until recently, successful defenses against foreclosure were relatively rare. But that is changing rapidly – more homeowners are successfully challenging foreclosure actions.

This sea change is due, in large part, to the unearthing of more and more evidence that the real estate industry has been rife with fraudulent and predatory lending practices. Because of this evidence, courts that once rubber-stamped foreclosure actions are now beginning to shift their sympathies towards homeowners.

Homeowners and their attorneys are taking advantage of this change in judicial attitude, and challenging foreclosure actions in many different ways. Here’s a review of some of the most common defenses to foreclosure, and how to raise them in court.

How to Raise a Defense to Foreclosure

In order to raise a defense to the foreclosure action, you must bring the issue before a judge. This is automatic in about half the states, where foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders.

In the other states, foreclosures typically take place outside of court (these are called non-judicial foreclosures) and you have no automatic means to mount a legal challenge. To have your defenses ruled on by a judge in these states, you have to file a lawsuit alleging that the foreclosure is illegal for some reason and asking the court to put the foreclosure on hold — pending the court’s review of the case. 

Common Foreclosure Defenses

As courts are increasingly sympathetic to challenges to foreclosure actions, attorneys across the country are raising many different types of defenses. Below is a description of the most common of these.

The Terms of the Mortgage Are Unconscionable

Over the years, attorneys have used a branch of law called “equity” to come up with a panoply of approaches to defending against foreclosure. The equity branch of law focuses on fairness in situations where a legal statute doesn’t provide adequate relief. It usually isn’t enough to simply claim that the foreclosure is unfair; rather, you have to come up with a specific justification for your position that has previously been recognized by the courts.

One such justification is a principle known as unconscionability — that is, the terms of your mortgage, or the circumstances surrounding it, are so unfair that they “shock the conscience of the judge.” In one case where this defense was successful the borrower spoke very little English, was pressured to agree to a loan that he obviously couldn’t repay, was not represented by an attorney, and was unaware of the harsh terms attached to the loan 

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The Housing and Economic Recovery Act increases industry regulation and helps some homeowners at risk for foreclosure.

On July 30, 2008, the Housing and Economic Recovery Act of 2008 (“the Act”) was signed into law. The Act, Congress’s response to the mortgage meltdown of recent years, aims to:

• make sure the government-sponsored home loan agencies don’t ever run out of money
• increase regulation over the government-sponsored housing agencies and over mortgage brokers
• provide relief to a portion of the homeowners who are at risk of foreclosure, and
• assist states and localities in converting abandoned property into affordable housing.

Here’s a brief primer on the Act.

What Is the Housing and Economic Recovery Act?

The Housing and Economic Recovery Act of 2008 (H.R. 3221) is a collection of more specific acts that address issues related to the U.S. residential housing and finance industries. This collection includes:

• the Federal Housing Finance Regulatory Reform Act of 2008, which addresses structural and operational issues regarding the financing of residential real estate through the FHA and the government-sponsored home loan agencies known as Freddie Mac and Fannie Mae
• the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, which creates a new bureaucracy to regulate the mortgage broker industry
• the HOPE for Homeowners Act of 2008, which creates a program under which certain homeowners will have the opportunity to refinance their way out of foreclosure if they’re able to get their original lenders to go along, and
• various subtitles allocating billions of dollars to fund foreclosure-avoidance counseling agencies, and to purchase and rehabilitate abandoned properties for the purpose of expanding the nation’s stock of affordable housing.

Here’s an explanation of some of the more important provisions of the Act for current or would-be homeowners.

Bailout of Freddie Mae and Freddie Mac

By far the most important aspect of the Housing and Economic Recovery Act of 2008 is that it places the U.S. Treasury (and its ability to print money) in the service of Freddie Mac and Fannie Mae — the two home loan banks that either own or insure at least half the loans made to U.S. homebuyers. In other words, the Act assures prospective investors and homebuyers that the U.S. home loan industry’s doors will be open for business even if the rest of the economy shuts down.

While the downside of this commitment is potentially huge — a taxpayer bailout involving many billions of dollars if the entities fail — some of the folks who purport to understand macroeconomics assure us that the risk of failure is very small. Other economic mavens aren’t so sure. All parts of our government, however, are dedicated to not letting the housing industry go bust.

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