September 11, 2012

Loan Modification Fraud & Scam Prevention

Loan modification fraud is a particular problems during economic downturns, when increasing numbers of homeowners are facing foreclosure and/or bankruptcy. Unlike mortgage loan originators and real estate agents who work in the housing industry, mortgage modification companies are largely unregulated, although they are getting a lot of attention from governmental bodies across the country. The best way that consumers can avoid foreclosure in a loan modification scam is to thoroughly research the company that they would like to use. There are several ways to do this, and they are:
  •  Contact the Better Business Bureau in the community in which they do business. They will be able to give feedback as to what consumers have said about that company. Many modification companies do business in multiple states, so the office of the company may be in a different on than where the property is located.
  • Search government web sites for advice, including federal, state and local ones. They may have info on specific companies.
  • Search the Internet. People who have been underserved in any business, especially one that involves saving their home from foreclosure, want to tell lots and lots of people about it. The web is full of blogs and other sites where people vent as to how they were treated. If enough people have been impacted by a company, it will be easy to find by entering the name of the business into Google..

Credit bureaus, which receive borrower payment history information from lenders, have current information as to who is late on, or has missed a mortgage payment. They in turn sell this information to loan modification companies, who use the data to market potential clients. Modification companies will often contact borrowers either by mail or phone, and less scrupulous ones will knock on the door. There is little regulation as to what they can do and say to get prospects to talk to them. Some modification companies will pass themselves off as legal firms, with legal-sounding names. Borrowers need to ask them if they are, in fact, attorneys. If so, a quick call to the local bar association might be a good idea, to see if they are in good standing.
Shopping for a loan modification service should be like shopping for a mortgage loan, or an attorney. Both offer, or ought to offer, free initial consultations to assess the situation, and then a small fee upfront, but the bulk of the payment should come after services are provided. Many loan modification companies, per their contract, require a huge upfront fee that is often non-refundable. Should the modification company decide to drag their feet, or give up all together on behalf of the borrower, they are still going to be hard-pressed to give any type of deposit back to the borrower.
This is where a borrower may have a lot of equity in a property, but is unable to make their payments and wants to stay in the property. So they sell the property to an investor who will rent it back to the borrower. The sales price will usually be lower than the market value of the property, but the new rental payment will be lower than the previous mortgage payment, usually lower than market rent. Sometimes, the deal is presented as a rent-to-own arrangement where the original owner can eventually reclaim title to the property. People entering into these types of contracts need to make sure that the rental agreement indicates what the future payments will be. Landlords, after buying the house for less than market value, may start increasing the rent. Eventually, the former owner cannot keep up with the payments and is evicted. In other cases, rent-to-own agreements may have hidden fees and penalties that are likely to cause the original owner to default and face eviction.
This is where a scammer will approach the borrower and offer them temporary financing, after they sign over ownership of their home, until more permanent financing at a lower rate can be arranged. Scammers may also pose a scenario where they propose to buy the home from the borrower, stating that they will rent it back to them until financing that the borrower can be obtained, then return ownership. Scammers may also ask that borrowers make payments to them (the scammers) directly while the scammers arrange for new financing. Scammers often pocket the money, putting the borrower in a far worse situation than they were in prior to meeting them.


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