Posted by: Lisa Pampuch | October 25, 2011

Byzantine loan-modification process is con artists’ dream

The foreclosure crisis that has gripped the US real estate market over the last few years has been especially painful here in California. RealtyTrac reports that in September 2011, one in every 259 housing units in California received a new foreclosure notice, one of the highest rates in the nation.

Although Santa Clara County as a whole has not fared as badly as other parts of the state, within Santa Clara County, South County’s cities are among the hardest hit. RealtyTrac reports that last month, 66 new foreclosures were filed in Morgan Hill, for a rate of one of every 224 housing units. Gilroy saw 90 new foreclosure filings, or one of every 176 housing units. Only the sparsely populated Mount Hamilton area (population 35) had a higher rate: Its one new foreclosure filing gave it a foreclosure rate of one of every 12 housing units.

RealtyTrac Foreclosure Maps for Morgan Hill (left) and Gilroy (right) for September 2011

The flood of foreclosed properties depresses property values, reducing property tax revenue to schools, libraries, municipalities and the state. As property values fall, even homeowners not at risk for foreclosure lose some or all of the equity in their homes, reducing their net worth and their confidence in the economy, and forcing many to abandon plans to move or retire.

Con artists see opportunity in this crisis. Realtor Rebecca van Dahlen of Coldwell Banker Northern California’s Morgan Hill office has seen many fraud victims and is outraged.

“Homeowners are driven to these scams because it’s so difficult to get through the loan-modification process. It’s more difficult than dealing with the DMV, it’s more difficult than dealing with an insurance company,” van Dahlen said. “I can’t tell you how many homeowners I run into who have been scammed and it’s just too late for them.”

When homeowners apply for a loan modification, they start a frustrating, Byzantine process, van Dahlen told me: Lenders require homeowners to complete and return many complicated forms; lenders often lose submitted paperwork, then require homeowners to resend it. Information reported by one lender telephone representative frequently contradicts information given by the next representative with whom a homeowner speaks. Loan-modification applications are frequently rejected for vague reasons, homeowners are often told to apply for different programs and they start the cycle all over again. Meanwhile, their financial difficulties worsen.

van Dahlen recounted one couple who had not missed a payment on their mortgage, but who was at risk due to reduced income. They applied for a loan modification but their lender declined stating that the couple had missed a deadline for returning paperwork. It was paperwork that they had submitted. When this frustrated, worried couple received a slick, official-looking brochure — it even sported the Housing and Urban Development (HUD) logo — in the mail from a company promising to help them through the loan-modification process, they were prime targets.

The company burnished its credibility by “waiving” any fees for their services and sending them lots of legitimate-looking forms to sign. The loan-modification service agreed to shepherd van Dahlen’s clients through the loan-modification process. It filed paperwork with the couple’s lender, and a few weeks later, notified the couple of their new mortgage payment, provided payment coupons, and directed them to send the new payment not to their lender, but to the loan-modification service.

The couple was overjoyed, but their relief was short-lived. The loan-modification service had not obtained approval for a loan modification, and kept every dime (several thousand dollars) of the “modified loan payments” that the couple paid it in lieu of their regular mortgage payments. The couple didn’t learn of the fraud until they received a foreclosure notice from their lender.

van Dahlen reported this case to the district attorney’s office and is hoping that a prosecution will result. Unfortunately, it’s not an isolated case, and it’s not the only scam targeting financially distressed homeowners.

If you’re having difficulty making your mortgage payments, be a skeptic. Van Dahlen suggests that if you use a loan-modification service, verify every claim with your lender. If your loan-modification service tells you that they filed a loan-modification application or tells you that your application was approved, call your lender to check. The Federal Trade Commission advises homeowners never to work with any business that “tells you to make your mortgage payments directly to it, rather than your lender.”

The FTC provides more detailed advice on its web site.

The bottom line from van Dahlen: “There is help out there. You just need to be a really informed consumer about it.”

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