07/03/07: Beware The Bird Dog: Avoid Foreclosure Scams

Mortgage foreclosures are up – and so are the scams.

You have just received a letter from your mortgage lender advising that if you do not bring your mortgage payments current, the lender will have no alternative but to begin the foreclosure process.

Within days after receiving this notice, you get a telephone call: “Hi, my name is I.B. Scammer, and I understand that you are delinquent on your mortgage payments. You don’t want to lose your beautiful home, and my company can assist you. When can I come over to explain how we operate and how we can help you?”

Hang up, immediately. In the trade, these people are often referred to as “bird dogs” – literally going after you when you are down.

There are many different kinds of mortgage foreclosure scams. One is called a “fractional interest transfer”. Here is how that works.

When a homeowner files for bankruptcy protection, the law provides for an “automatic stay”. That means that no creditor can take any legal action (including foreclosure) against the debtor without getting Bankruptcy Court approval. This is referred to as a “lift stay”.

The home owner pays a monthly fee to the “foreclosure specialist”. In return, that specialist arranges to transfer a small percentage of the homeowner’s property to a person who is already in bankruptcy. According to a Bankruptcy Foreclosure Scam Task Force out of California, often the entity in bankruptcy is fictional. And while the homeowner cannot be foreclosed upon because of the automatic stay, in the end that consumer has conveyed some or all of their home to the scam artist.

Another type of scam involves what is referred to as “rescue operations”. The National Consumer Law Center issued a report in June of 2005 entitled “Dreams Foreclosed: The Rampant Theft of American’s Homes Through Equity-Stripping Foreclosure ‘Rescue Scams'”. Little did the Law Center realize two years ago how relevant their concerns would be today.

The Center highlighted three varieties of “rescues”.

The first they call “phantom help”. Here, the “rescuer” will charge the unsuspecting homeowner excessive fees to do what the consumer could have done on his own. For example, the “rescuer” may make some phone calls or paperwork, but eventually he “abandons the homeowner to a fate that might well have been prevented with better intervention”.

A second variety reported by the Center is called the “bailout”. In this situation, the caller tells the consumer that if the homeowner will sign over a deed to the house, the caller will pay off the mortgage debt, allow the homeowner to stay in the house for at least one year, and then the consumer can repurchase the property for a price – which usually is considerably more than the real value of the house. The Center concluded that “the terms of these deals are almost invariably so onerous that the buyback becomes impossible, the homeowner permanently loses possession, and the ‘rescuers’ walk off with all or most of the home’s equity”.

It should be noted that the Center found examples of “bailout” in many jurisdictions, including the District of Columbia.

The third variety the Center calls “the bait and switch”. The homeowner believes that he or she is merely signing documents for a new loan so that the mortgage can be brought current or paid of. But in reality, the consumer has signed a deed to the house over to the “rescuer”.

It should be pointed out that in 2005, then-Governor Ehrlich signed into law legislation that protects homeowners from these rescue consultants. Similar legislation is under consideration in the District of Columbia. And recently, Governor O’Malley started the HOPE initiative (Home Owner’s Preserving Equity), whereby $111 million dollars of State funds will be used to assist homeowners in financial trouble.

In times of trouble, consumers are desperate for assistance, and often rely on emotions rather than careful consideration of options. But there are many options available to consumers who are facing foreclosure.

First, talk with your mortgage lender. Most legitimate lenders do not want to foreclose. This decision is not based on their sympathy for the homeowner, but on economic reality. If no one buys the house at the foreclosure sale, the lender is stuck with the property, and must pay the taxes and insurance until it is ultimately sold.

Your lender will have a number of options,. They can defer or reduce the monthly payment for a period of time. They can arrange to refinance your existing Adjustable Rate Mortgage so that you will have fixed monthly costs instead of facing escalating payments every year. They may also allow you to sell your house on what is called a “short sale”. This means that you can reduce the price of the house, and the lender will forgive some or all of any shortfall.

Second, talk with a consumer counseling service in the jurisdiction where your property is located, For example, Maryland homeowners can use the services of several Foreclosure Counseling Services located throughout the State. (The full list can be found at www.oag.state.md.us/Consumer/foreclose.htm).

Senior citizens – especially those on low income – can contact their local AARP office.

Third, talk with your neighbors. Perhaps they can provide some temporary financial assistance. After all, if your house is foreclosed upon, that may reduce the market value of the neighborhood.

Fourth, arrange to see an attorney who specializes in bankruptcy law. While no one really wants to file for bankruptcy protection – and recent changes in the law make it difficult to do so – it is an option that must be considered as a last resort.

The Consumer Law Center made a number of “what not to do” recommendations:

– don’t panic;

– don’t sign a contract under pressure;

– don’t sign any papers before consulting with legal counsel;

– don’t rely on the rescuer’s translator if you are not conversant in English. All too often, that translator is another “bird dog” paid by the rescuer to make his case for him, and

– don’t rely on verbal statements or promises; get everything in writing.

Consumer protection laws and education are very important. But you – the homeowner – must protect yourself. Just say “no” to the Bird Dog.

– boilerplate-