If you follow the news these days you can find a growing number of stories concerning “foreclosure rescue specialists.” State attorney generals, legislators and community groups will tell that such folks are hardly candidates for sainthood, that foreclosure rescue specialists are instead engaged in home-stealing scams powered by fraud and deception.
But while states are busily trying to stamp-out foreclosure rescue schemes they’re also enacting laws which are so broad they may snare legitimate investors. As you’ll shortly see, investors have a need for extra caution these days as we enter a new period of state activism.
To see how mortgage rescue programs work, imagine that Mr. Sherman lost his job. It quickly happens that a few mortgage payments are missed and Sherman is soon desperate and scared. Bought for $200,000 and refinanced once, the property has been Sherman‘s home for nine years. He pays $1,200 a month for the loan, but now foreclosure looms. Instead of contacting his lender or asking a community group for assistance, he sees a flyer for a company that promises to stop foreclosures.
Sure enough, says a representative for the Arcola Foreclosure Rescue League, they can help. They’ll stop the foreclosure instantly. How? They’ll pay off the mortgage, they’ll give Sherman $20,000 in cash to pay off credit card bills and Sherman can stay at the property.
“Don’t worry about a thing,” said the Arcola representative. “We have money and we help people all the time. We’ll do all we can to save your home from those evil lenders.”
The paperwork is signed and magically worries about foreclosure are gone. But what really happened is this: Sherman didn’t get a new loan. Instead, he actually sold his home to Arcola for the remaining mortgage balance, closing costs and $20,000 in cash, a total in this case of $190,000 for a property with a market value of $400,000.
Arcola, however, is there to “help.” It offers to instantly sell the property back to Sherman for $250,000.
As to the rent, Arcola is as good as its word. It rents the property back to Sherman — for $2,000 a month.
The situation is impossible for Sherman. He cannot finance a re-purchase because of the late payments on his credit report. He can’t make the monthly rent payments for long because even if he again becomes employed the cost is too great. In a few months he leaves, powered in part by a “moving allowance” that will soon lapse if he stays.
As the number of foreclosures nationwide increases, the number of foreclosure rescue scams is also on the rise, a trend which has not gone unnoticed.
· “Foreclosure assistance scams kick consumers who are already down, so we’re working to shut down the scammers,” says North Carolina state attorney general Roy Cooper.
· “Consumers facing foreclosure should be wary of companies that solicit them with offers to help them avoid the loss of their home,” says California attorney general Bill Lockyer. “Foreclosure consultants often charge high fees, but take the money and run.”
· “Mortgage rescue fraud is a cancer that is eating away at our neighborhoods,” says Illinois attorney general Lisa Madigan.
You get the picture. State governments across the country are going after bad apples. But there’s a catch.
It’s tough to write legislation which targets scammers and cheats. How do you say in proper legal language that it’s illegal to buy a home from someone facing foreclosure? Arcola, after all, did stop any possible foreclosure. It did allow Sherman to stay at the property.
What Arcola did not do is this: It did not rescue the property for Sherman. In the end, he lost his home and most of his equity — and Arcola knew full well that would happen the minute they answered the phone. The basic fraud in this situation was that Arcola represented itself as an agent trying to help Sherman when in fact it was nothing other than a buyer seeking to acquire Sherman‘s property.
“There’s a real challenge here,” says James J. Saccacio, chief executive officer of RealtyTrac, the nation’s largest source of foreclosure data. “You want to get rid of the scammers but if you discourage legitimate investors the number of homes going into foreclosure will skyrocket. Balance is needed to assure we do not throw out the baby with the bathwater.”
State lawmakers have been busy crafting laws to stifle foreclosure rescue specialists, mortgage fraudsters and “equity-stripping” schemes. Recent examples of legislation addressing such issues can be found in California (Civil Code 2945), Illinois (SB 2349), Maryland (SB 761), Minnesota (325N ), New York (SB 4744) and Rhode Island (H 7650).
Laws in a growing number of states set stiff requirements for foreclosure rescue specialists, update mortgage fraud rules and outline extensive disclosure regulations. Some state rules effectively require that foreclosure rescue consultants must pay 82 percent of all sale profits back to original owners if a property is re-sold within a given period, perhaps as long as 18 months in some jurisdictions.
The caveat though is that anti-fraud legislation may inadvertently include investors generally and not just illicit foreclosure rescue consultants.
What are the lessons for legitimate foreclosure investors? Three points stand out.
First, the rules regarding foreclosure purchases are changing. New legislation — which can include stiff fines, damages and jail time for violations — must be taken seriously. Before entering the marketplace, consult with a knowledgeable real estate attorney to determine what’s allowed — and what’s required — in your jurisdiction.
Second, be certain your real estate broker is familiar with the latest rules and regulations. This is important because when a broker is acting as your agent you may be held responsible for his or her acts.
Third, speak with lawmakers and ask them to clarify state rules. Unlike fraud and misrepresentation, buying distressed properties is not a crime. Lawmakers need to be careful that in curtailing the bad guys they do not inadvertently punish legitimate investors and marketplace activities that are both lawful and necessary.
Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 90 newspapers.