Fake Mortgage Fixers Put Fix on Homeowners

When times are tough, scam artists know just how to exploit a desperate situation. That's especially true when it comes to the housing industry, which has been decimated by a record number of foreclosures and defaults in the past year.

One of the rip-offs that has emerged in this mess: fraudulent loan modification companies. Preying on troubled homeowners’ fears, these companies promise to negotiate lower interest rates and/or principal on loans so consumers can afford their monthly payments and stay in their homes. Unlike legitimate loan-modification services, rip-offs require the homeowner to pay an upfront fee -- usually in the range of $500 to $1,500. Once the homeowner pays up, the scammer takes the money and runs.

While there are no official estimates on how many phony loan modification companies are out there, housing advocates say they are on the rise. “There’s been a proliferation of mortgage scams…It’s really hard to qualify, but we hear of something new once every two weeks,” says John Snyder, manager of foreclosure programs for NeighborWorks America, a community development and housing nonprofit organization.

The mortgage modification industry sprung up about a year ago as credit dried up and troubled homeowners with adjustable rate mortgages were left with few options to avoid foreclosure, says Snyder. Contacting strapped consumers either by email, mail or fliers placed under front doors, these companies appear to offer homeowners one last shot at keeping their home. The problem is that these con artists never actually negotiate with the lender. Making matters worse, some homeowners stop making mortgage payments thinking that everything is being taken care of. Eventually, however, they realize they’ve been had and, in some case, it’s too late to save their home.

There are legitimate companies out there, but homeowners need to check their credentials first (see our sidebar below for tips on doing so). Over the past six months, a rash of former real estate professionals have rushed into this new field without adequately familiarizing themselves with modification procedures and lender guidelines, says Snyder.

As soon as the $700 billion government bailout was announced last month, Greg Rand, managing partner with real estate firm Prudential Rand Realty, says he received a handful of emails from loan modification companies offering to train and certify him as a loan modification counselor. Some of the companies then offered to sell him names of homeowners (a.k.a. potential customers) who are facing foreclosure. "It strikes me that quality control was not top of mind," says Rand.

The potential fallout of using an inexperienced modification firm can be devastating to a struggling homeowner. Many banks will only allow a consumer one shot at reworking his loan, says Justin Pane, vice president of Amerimod Modification Agency, one of the largest modification companies in the country. If a third party helps negotiate terms that still aren't affordable for the homeowner, he could eventually lose his house.

Even the companies that do their jobs well don't come cheap. Amerimod Modification Agency charges 1% of the loan amount. So a person with a $200,000 mortgage, will pay a fee of $2,000. "There's no reason to pay for that service," says Faith Schwartz, executive director of the Hope Now Alliance, a government- sponsored partnership of lenders, trade groups and counseling agencies, which offers similar help at no cost.

Amerimod Modification Agency says its fees reflect the costs of a labor-intensive service that many customers haven’t been able to receive elsewhere, mainly because the nonprofits are so overwhelmed with clients that they're too busy to help.

The Hope Now Alliance acknowledges that many nonprofits had been overtaxed. "There was a backlog," says Schwartz. But the industry has worked hard to address the problem by adding more staff and establishing more direct lines of communication between lenders and counselors, she says.

Here's how to spot a loan modification scam and seek out legitimate help.

Guarantees. Watch out for any company that makes promises. There's no way for a loan modification company to know if it can successfully negotiate a better interest rate or other terms on a homeowner's loan -- especially before they even see the loan documents or speak with the lender, says NeighborWorks America's Snyder.

Copycat names. Be on the lookout for organizations that sounds remarkably like legitimate nonprofits. (Click here for a list of counselors that work with Hope Now.) As soon as the Hope Now Alliance was up and running, scam artists started creating similar sounding web sites like Hope Now USA and Opportunity for Hope Now, says Schwartz. Be particularly cautious of names with the words "hope," "FHA," "USA," or "America" in them.

Upfront fees. Avoid any company that requires an upfront fee for their services. It's not only considered unethical, it's also illegal in some states, including Illinois, Minnesota and New York.

Contact your lender. It's always best to start off by calling the mortgage underwriter's loan-servicing department and trying to negotiate better terms for yourself. Be aware that the lender may turn away mortgage holders who have yet to be delinquent on their payments.

Reach out to a housing counselor. Homeowners who can't seem to make any progress with their lenders on their own should call the Hope Now Alliance (888-995-HOPE) or a HUD-approved housing counselor for help. This trained staff has access to dedicated phone and fax lines that allow them to work more efficiently with the banks. Best of all, their services are free of charge and are available to homeowners of all income levels.