As foreclosures rise, states struggle to combat mortgage scams

Mortgage scams proliferate as desperate homeowners try to avert foreclosures, pushing state lawmakers into action.

It was one year ago that home-owner B.L. Davis began to have trouble paying his mortgage.

A medical problem, followed closely by his furnace giving out, depleted his savings and left him unable to pay the $1,900-a-month mortgage on his roomy brick house with a big pool and a neatly landscaped yard.

His answer: a California company that pledged to get his mortgage loan modified. In return, the firm wanted nearly $2,000 upfront, and a seemingly affiliated debt-relief group asked for another $1,000. Desperate, Mr. Davis paid up.

The story ends with Davis getting nothing in return for his $3,000, and instead needing to borrow $14,000 to save his house two days before it was to be sold at auction.

“I’ve still got my house, but now I’m worse off because my credit has drastically been affected, and now I’ve got an extra loan,” Davis says.

Davis’s story has become part of a national parable. With the downturn in the housing market, scams promising to stop foreclosures or modify loans quickly are growing. This year, the FBI expects to track an estimated 174,000 reports of suspicious activity for mortgage-related fraud cases – a 276 percent increase over 2008.

States are responding. Michigan has promised to refund residents duped by several foreclosure scams. In October, Delaware approved a law that bans companies from charging an upfront fee for promises to modify a loan or forestall foreclosure.

The federal government, too, is considering action. Sen. John Kyl (R) of Arizona has cosponsored a bill that would protect home buyers from fraudulent practices and provide $200 million for states to combat scams. President Obama created a federal task force Nov. 17.

The fraud is “egregious,” said Kay White, director of the Administration of Resources and Choices in Tucson, Ariz., a nonprofit that provides free assistance to homeowners in distress. By the time many homeowners arrive at the agency, “they’ve already been scammed,” says Ms. White.

States are scrambling to get a handle on the problem, which could deepen as large numbers of adjustable-rate mortgages reset to higher levels in the near future.

• In California, complaints to the Office of the Attorney General regarding companies offering loan modification and foreclosure assistance grew to more than 2,500 in the first 10 months of 2009, up from about 200 in 2008, says spokesman Evan Westrup.

Likewise, the state bar has received more than 1,200 complaints this year involving attorneys, says Suzan Anderson of the bar’s Loan Modification Special Team.

“This is a huge problem,” Ms. Anderson says. “I’ve never seen anything like this with attorneys and the real estate market.”

• In Arizona, financial institutions have filed nearly 2,400 reports of suspected mortgage fraud with an estimated $98 million in losses this year, says Julie Halferty of the FBI Mortgage Fraud Task Force in Phoenix. That is up from about 1,780 reports and $72 million in 2008.

Mortgage brokers, real estate agents, and telemarketers formerly pushing credit cards are some of the players exploiting market conditions, says Ms. Halferty. “In 2007, we started seeing an enormous volume of fraud reports in this area,” she adds.

• In Nevada, whose foreclosure rate is the country’s highest, home-owners are now bombarded with advertisements that guarantee loan modifications. In reality, people who fall prey end up in worse financial shape because they pay fees and get no help at all, says John Kelleher, chief deputy state attorney general.

This is where homeowner Davis finds himself. He did research online and found that various lawyers gave United Law Group high marks, which gave him peace of mind. He signed a contract with the firm in March. Soon after, Davis got a call from what he believes was an affiliated group, which persuaded him to enroll in a debt-relief program for a better chance of getting his mortgage loan modified. That cost another $1,000.

“They told me my case would be resolved in three months,” he says.

At the company’s suggestion, he stopped paying his mortgage and talking to his lender. By July, he started questioning the lack of progress on his case, and the firm became unresponsive, he says. In August, a foreclosure sale notice left on his front door left him panicked.

Davis says someone at United Law Group called the notice a scare tactic and told him not to worry, but Davis adds that his subsequent calls and e-mails were mostly ignored. In the end, Davis rejected the firm’s final recommendation to file for bankruptcy and instead filed a complaint against the company with the Arizona Attorney General’s Office.

Then he borrowed $14,000 from a relative, got caught up on his mortgage, and stopped the sale of his house two days before it was to happen on Nov. 12.

The State Bar of California recently placed attorney Sean Rutledge, who started United Law Group in August 2008, on “inactive enrollment,” for alleged misconduct related to loan modifications.

A law firm spokeswoman declined to address Davis’s case specifically but blamed banks for being unresponsive to the needs of homeowners. “I can tell you that we are actively working to help all of our clients to resolve their issues,” Nina Vultaggio says.

Arizona is trying to help homeowners like Davis. A state law will require Arizona’s loan officers to be licensed as of next year.

“Anybody’s who’s running a loan modification company should get themselves licensed as a mortgage broker or a mortgage banker or a consumer lender and do it quickly,” says Jack Huddock, a spokesman for the Arizona Department of Financial Institutions.

But that might not be the end of it.

In Nevada, companies that can’t get licensed either because they can’t pass the background check or they can’t come up with a $75,000 bond are just reorganizing themselves as a nonprofit so they can be exempt.

“But they’re still doing the exact same thing,” says Mr. Kelleher. “They’re still scamming people.”

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See also:

Record 9.6 percent of homeowners are behind on their mortgages

Foreclosure surprise: 10 fastest-growing problem cities are newcomers

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