Wherein I discuss some of the scams and traps that cheat struggling homeowners out of money, and can cost them their homes
(insert cliche about how bad the economy is; we all know it’s pretty rotten right now)
In fact, for many homeowners the economic troubles have given them a double-barreled problem; first, home values are sometimes half what they used to be, so the houses are underwater. Second, with reduced income, they often cannot afford to make the payments to service those high-balance loans.
The result is that, in unprecedented numbers, people are losing their homes to foreclosures, forced short-sales, or deeds-in-lieu-of-foreclosure.
As an attorney primarily practicing bankruptcy law, I meet with people on an almost daily basis who are at the end of their rope with their mortgage lender. The sad truth is that not only will many of them lose their homes, a great many of them should never have gotten the home loans to begin with, and wouldn’t have gotten them if they, or the lenders, knew what would happen to housing values.
Though it is very popular to express hope that the government, or the mortgage industry, will help people stave off foreclosure, in many cases there is simply no salvaging the loan. If even a reasonable payment on the property would be more than half of the borrower’s income, it is in nobody’s interest to prevent foreclosure or a short sale. Homeownership is a worthy goal, but not everyone can or should afford to be a homeowner.
In many states, including California, the typical foreclosure involves the filing of public-record documents, including notices of default or of a pending trustee’s sale. One side-effect of these public records is that cottage industries of “foreclosure prevention” services have cropped up around the country, and in many cases, they are scamming desperate people out of money at the precise time they need their money the most.
One of the most pervasive scams involves help with loan modifications. In the past, I have worked with clients trying to get modifications, and have even handled some professionally. Here’s what I learned through that experience: no attorney, and certainly no non-attorney, can consistently achieve better results than the borrower would achieve on their own. There is no secret handshake that allows a loan to be modified; the bank requests documents, you provide documents, they either approve or deny relief. Yes, the banks lose documents, and yes, they change their processes and give conflicting information. They do the same thing to third-party modification companies. Don’t confuse the bank’s ineptitude with your own inability to get the loan modified.
To be clear: if a modification can be achieved, you can attain one without help from anyone, especially anyone who wants to relieve you of several thousand dollars along the way.
Worse than the modification services, however, are the out-and-out scams. These include forensic loan audits and ownership transfers. In a forensic loan audit, the company charges the homeowner a hefty fee to review loan origination documents, and then tells the borrower about all sorts of heinous omissions and mistakes made by their lender. This, they claim, will give the borrower leverage to get a loan modification, or even to sue the lender! In the worst of these scams, the initial payment will only cover the audit itself, and then the company will ask for continued costs, such as $1,000 per month, in order to hire an attorney to sue the lender. They tell the homeowner that this will indefinitely delay foreclosure.
Back when he was the state’s attorney general, Governor Jerry Brown filed a lawsuit against some of the largest forensic loan audit companies, accusing them of scamming millions of dollars from homeowners by promising things they could not deliver. Make no mistake- these do not work. The promises boil down to either a free house, which you will not get, or an indefinite delay in your foreclosure, which they cannot deliver. The idea that the bank will be somehow forced to modify to avoid a lawsuit is simply not true. Companies that promise to add you to a class action lawsuit against your lender are engaging in a similar type of scam, with big investments by the homeowner, big promises, and little if any chance of success.
The final scams involve deeding the property to third parties, often third parties involved in bankruptcy, to take advantage of bankruptcy protections and prevent foreclosure. Unlike the other scams, which at their worst can cost money and emotional distress, this arrangement is certainly fraudulent, and possibly criminal. You should never, under any circumstances, sign off on a transfer of ownership to a distressed property, unless it is agreed to by your lender.
I’m sure in a future post I’ll be discussing when and how bankruptcy can help preserve home ownership. After all, it’s my profession, and I love what I do. My purpose in posting this today is to warn people against the “too good to be true” scams that are preying on people who are desperate to keep their homes. Before you spend a dime on foreclosure prevention, you should research the company, get a second opinion, and figure out exactly what your goal is, and what you realistically hope to achieve. If it sounds too good to be true, (finish cliche here).