SCAMMERS TARGET HOMEOWNERS AS FORECLOSURES INCREASE

As the number of foreclosures rises, homeowners unable to make their mortgage payments are facing another growing threat: "foreclosure rescue" scams.

State and federal authorities say they are investigating an increasing number of homeowner complaints about fraud and deception by companies that engage in lending to financially distressed borrowers seeking to avoid foreclosure. Several states have recently passed or are contemplating new laws to provide more protection against dishonest businesses trying to take advantage of already vulnerable homeowners.

The problem centers on foreclosure-rescue companies, which target homeowners behind on their mortgage payments through newspaper ads or fliers claiming services such as "fast cash," "equity funding" and "no credit check." According to some recent cases filed by consumers and regulators, the companies mislead borrowers into believing they can save their homes from foreclosure in exchange for a transfer of the title for a year or two. The companies promise borrowers they can stay in their homes by paying rent for that period, giving them time to catch up financially until they can buy back their property. Often unknown to the borrowers, however, the companies may have sold their homes to a third party, stripping out the home equity and leaving the borrowers on the verge of eviction.

"More and more, we're seeing some real sharks, pretending to be the homeowner's best friend, but what they are after is the equity in the house," says Arizona Attorney General Terry Goddard.

Foreclosure fraud has existed for a long time. But in recent years, experts and law-enforcement officials say, the schemes have grown increasingly complex, with scam artists often eyeing the chunks of equity that homeowners across the country amassed during the rapid housing-price appreciation from 2000 to 2005.

The scams are getting a boost as the housing boom fades and the numbers of past-due mortgage loans and foreclosures climb. Foreclosures historically have hit mainly homeowners with weak credit ratings. But now, a wider range of borrowers are struggling to pay off high-priced loans that lenders churned out during the boom. Online foreclosure-data service RealtyTrac says more than one million borrowers have seen their properties put in foreclosure so far this year, up 27% from the same period last year.

Statistics on the exact number of foreclosure-fraud cases filed are hard to come by as they are usually lumped together with mortgage fraud, which includes fraud against both lenders and borrowers. The Federal Bureau of Investigation estimates that mortgage fraud led to over $1 billion in losses in 2005, up from $429 million a year earlier. "We're increasing our focus on mortgage fraud," says Bill Stern, a supervisory special agent and mortgage-fraud coordinator at the FBI.

Alejandro and Martha Balderas tried for months to refinance their Chicago home and take it out of foreclosure after medical bills kept the couple from keeping up with their mortgage payments. They thought they had found their white knight when Platinum Investment Group LLC, a mortgage and real-estate investment company, promised the couple a loan against their house so they could pay off their mortgage and stay in their home, according to a complaint filed against Platinum in Circuit Court of Cook County, Illinois, by the state attorney general's office.

The Balderases, in their early 40s, signed on in April 2005 -- only to find out soon afterward that they had signed over their home to Platinum, which then sold it. Unable to keep paying "rent" to the company, they are now threatened with eviction, Ms. Balderas says. "It's a nightmare and we're reliving it every day," she says.

The Illinois attorney general charged that Platinum duped homeowners into transactions that caused them to lose substantial equity in their homes and face eviction. Platinum has denied the allegations. A lawyer representing Platinum didn't respond to requests for comment.

A total of 10 states have legislation in place to deter foreclosure-rescue fraud, including California, Georgia, Missouri, Minnesota, Maryland, Colorado, Rhode Island, New York, Ohio and Illinois, according to Creola Johnson, an associate law professor at Ohio State University.

A common feature among those laws is that they give homeowners the right to cancel the "rescue" transaction days before the closing. In addition, for instance, under the legislation passed in Illinois this year, if a company acquires any financial interest in a property in foreclosure and simultaneously leases the property back to the homeowner and gives the owner the option to buy it back at a later date, the acquirer, in certain cases, must pay the homeowner at least 82% of the property's fair-market value at the closing of the purchase.

The goal of the payout requirements under the Illinois law, which goes into effect Jan. 1, is to ensure that distressed homeowners receive a substantial and fair amount of home equity when entering into leaseback transactions, while giving legitimate foreclosure purchasers a reasonable chance to profit.

Another common type of consumer complaint involves so-called foreclosure consultants, who, for an upfront fee, promise borrowers to negotiate with their lenders to postpone or avoid foreclosures. Illinois and several other states forbid foreclosure consultants from charging an upfront fee before performing the agreed-upon services.

Still, homeowners who find themselves duped into foreclosure scams often have a hard time recovering their losses, consumer lawyers say. For example, state law may not protect consumers if their houses are sold to third parties who claim they were unaware of any alleged fraud, according to a National Consumer Law Center report on foreclosure fraud.

-- November 29, 2006

By Lingling Wei

From The Wall Street Journal Online