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.Skip to next paragraph
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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.