President Obama unveiled a plan Monday to provide a measure of mortgage debt relief for some homeowners who are underwater on their home loans.

Obama announced his plan from the front porch of a home in Las Vegas, which has one of the highest foreclosure rates in the country. Using executive powers that bypass Congress, Obama outlined how the plan would provide debt relief for homeowners hit hard by the housing bust.

The plan, spearheaded by the Federal Housing Finance Agency, which oversees government-sponsored lending giants Fannie Mae and Freddie Mac, alters the Home Affordable Refinance Program (HAMP), which has received substantial criticism for helping only a fraction of those it was designed to assist.

Under the plan, struggling homeowners with federally-backed mortgages will be allowed to refinance their home loans without getting a new appraisal or a full credit check. The program also eliminates some risk-based fees for borrowers.

Although the administration said the changes will help thousands of homeowners gain some much-needed mortgage debt relief, the plan does have some notable eligibility caveats:

• Only homeowners with mortgages backed by Fannie Mae and Freddie Mac are eligible for refinancing.
• Borrowers must be current on their mortgage payments, with no late payments in the past six months and no more than one late payment in the past 12 months.
• Borrowers must have good credit.
• Eligible mortgages must have been sold to Fannie Mae or Freddie Mac before May 31, 2009 and can’t have been previously refinanced under HAMP.
• Eligible mortgages must have loan-to-value ratios of more than 80 percent (“President Obama Announces New Program to Help Struggling Homeowners,” ABC News, Oct. 24, 2011).

Experts Question Mortgage Debt Relief Program’s Ability to Help Homeowners

Proponents of the program say that it would help boost the economy by reducing homeowners’ mortgage debt and giving them more expendable money. However, economists disagree on the number of people the program would benefit. Some say it wouldn’t affect more than 1 million households — more than 6 million homeowners are delinquent on their mortgage payments or are facing foreclosure — while others claim the restrictions are too tight and will leave behind underwater homeowners with bad credit.

Thus far, the $75 billion HAMP program has not fared well. Some experts say that HAMP has not been aggressive enough in addressing the problem. Others say HAMP bailed out banks, which should have been the target of a federal crackdown, by paying them to change the mortgages of struggling homeowners. Even Obama recently admitted that his administration has done too little to help homeowners.

“The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected,” Obama said in July. He said that the administration’s programs were “not enough. And so we’re going back to the drawing board.”

However, Obama also said that no federal program would be able to solve the housing crisis. “Some folks just bought more home than they could afford and probably they’re going to be better off renting,” Obama said.

In a conversation with reporters following the administration’s announcement of the new program, White House Press Secretary Jay Carney echoed Obama’s sentiments. “Unfortunately there is no silver bullet, there is no simple fundamental restructuring that will wipe away the damage done by the bursting of the housing bubble,” Carney said. “But there are measures that we can take that can help homeowners.”

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A Rhode Island Superior Court has agreed to a request by the state attorney general to shut down a Providence-based mortgage debt relief firm for allegedly charging customers illegal advance fees.

East Coast Fidelity LLC, also known as Fidelity Corp., allegedly charged the unlawful fees in exchange for promised home loan modification and foreclosure rescue services that were never provided.

The company and its manager, Janice McCarthy, were charged with violations of Rhode Island’s Deceptive Trade Practices Act and the Mortgage Foreclosure Consultant Regulation Act by attorney general Peter F. Kilmartin after his office investigated numerous consumer complaints against the company from several states.

Kilmartin’s investigation confirmed that the company had been soliciting advance fees for mortgage debt relief services and then failing to perform any debt relief work for customers. The investigation also verified consumer complaints that the company failed to provide refunds.

Kilmartin’s office announced Thursday that Superior Court Associate Justice Sara Taft-Carter had signed an order restraining and enjoining East Coast Fidelity and employees and agents of the company, including McCarthy, from operating as mortgage debt relief consultants, mortgage modification specialists, or any other business or service referenced in the Mortgage Foreclosure Consultant Registration Act, until further order of the court.

“The law is clear in Rhode Island that the soliciting of upfront fees for loan modifications or other types of foreclosure relief, is absolutely prohibited,” said Kilmartin. “As a result of these unconscionable and unscrupulous actions, homeowners, who are already desperate to save their homes are put in danger of imminent and irreparable harm. These types of scam artists are devoid of conscience in their deceptions and must be shut down” (“Attorney General Kilmartin Shuts Down Fraudulent Mortgage Modification Company,” Office of the Attorney General of Rhode Island press release, Oct. 20, 2011).

The state’s motion for a preliminary injunction against East Coat Fidelity and McCarthy is scheduled for Oct. 27.

The Rhode Island Attorney General’s Office encourages homeowners who believe they may have been victims of a fraudulent mortgage modification individual or company to contact the Consumer Protection Unit at (401) 274-4400.

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The U.S. Federal Trade Commission (FTC) has sued a California-based debt collection operation for unjustly collecting more than $9.4 million from alleged victims in a little more than two years, many of whom actually owed no debts.

The FTC described the sophisticated operation, which involved seven businesses, several of which shared a couple of addresses in Corona, as a “shake-down debt collection enterprise.” According to the complaint, the defendants used debt collectors speaking English and Spanish to call people nationwide and claim that the people who picked up the phone were facing a lawsuit over an unpaid debt. The collectors allegedly represented themselves as process servers, lawyers, and legal office staff.

When unwitting consumers returned the collectors’ phone calls, they were allegedly put in tough with a debt collector who escalated the situation with threats, including wage garnishment or property seizure. Some collectors that consumers spoke with allegedly claimed to be law enforcement and threatened consumers with arrest. The collectors allegedly followed a script to deal with consumers who asked questions or challenged callers.

The complaint alleges that the defendants unlawfully made their millions by pushing unwitting consumers into a corner with threats and then offering to “settle” the nonexistent legal action with consumers if they made an immediate payment to the defendants (“Feds Claim Corona-Based Debt Collectors Illegal,” The Press-Enterprise, Oct. 19, 2011).

On Oct. 11, U.S. District Judge Virginia A. Phillips granted a temporary restraining order against the defendants. Phillips also appointed a temporary receiver for the businesses.

Defendants named in the federal complaint include Rincon Management Services LLC, Prime West Management Recovery LLC, Union Management Services LLC, National Filing Services LLC, Investment Services LLC, Global Filing Services LLC, and Pacific Management Recovery LLC.

Defendants also include Jason R. Begley and Wayne W. Lunsford, two men the complaint describes as being behind the “deceptive and abusive scheme since March 2009.”

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Illinois Attorney General Lisa Madigan on Tuesday filed separate lawsuits against three Chicago-area debt relief companies for operating fraudulent credit card debt settlement and mortgage debt reduction schemes that bilked consumers out of thousands of dollars.

Madigan’s lawsuits allege that the companies took large advance fees from consumers — a practice that’s illegal in Illinois — in exchange for false promises to reduce their credit card debt or help them obtain a home mortgage loan modification and then provided little or no debt help on customers’ behalf.

Defendants in the lawsuits include Debt Care Financial Group Inc. and its president Malgorzata Baran; Starlex Financial Consulting LLC and Flagship Mortgage Corporation and employees Jeffery M. Entratter and Neil Borland; and E.A.C. Financial LLC and its owners Everett D. Pope and Colbi Andry (“Madigan Files Three Lawsuits Against Chicago Area Mortgage, Debt Settlement Scams,” Office of the Attorney General of Illinois press release, Oct. 18, 2011).

Debt Care Financial Group allegedly advertised debt settlement and home loan modification services that could reduce consumers’ debts by 50 percent to 70 percent. In total, Baran allegedly charged consumers at least $66,000 for debt relief work she never performed. The lawsuit claims Baran repeatedly denied requests for refunds and, in some cases, harassed and intimidated customers.

Starlex Financial and Flagship Mortgage allegedly charged consumers illegal advance fees between $500 and $950 for loan modification services that were never delivered. In total, the company’s scams allegedly bilked consumers out of more than $4,800.

Madigan also accused E.A.C. Financial of charging illegal advance fees of as much as $2,000 in exchange for false promises to settle consumers’ credit card debts or obtain a mortgage loan modification. Customers, who were told to stop paying creditors while the alleged services were being provided, reportedly ended up in worse financial shape than when they enrolled in the company’s programs.

The lawsuits ask the Cook County Circuit Court to shut down the companies, obtain restitution for consumers, and ban the businesses from providing debt relief services in Illinois. The lawsuits also seek civil penalties for violations of the Consumer Fraud or Mortgage Rescue Fraud Act.

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A Florida debt relief company that offered to help consumers settle credit card debts for less than what was owed is under investigation by the state attorney general’s office for taking customers’ money but failing to provide any debt relief service.

According to the Federal Trade Commission (FTC), Margate-based United Financial Systems Inc., a supposedly non-profit debt help company, has received over 440 consumer complaints since the beginning of 2010, more than any other South Florida business. The company allegedly offered to help consumers pay off their credit card debts by negotiating debt settlements with creditors but failed to do so. And because the company advised customers to avoid paying their monthly bills, many customers were reportedly left worse off, with delinquent credit card accounts and ruined credit.

Under its ongoing investigation, Florida’s attorney general ordered United Financial Systems to issue refunds to its customers by the end of August. However, some customers are reportedly still waiting for their money.

“I was promised a refund back in March,” said Louis Schmuck, a sheriff’s deputy in Hubbard, Ohio, who said United Financial Systems owes him more than $2,000. “I’m still sitting here with a lot of unpaid bills and a big mess” (“Margate Debt Relief Business Under Investigation,” Sun Sentinel, Oct. 15, 2011).

United Financial Systems’ owner, Christopher Boulahanis — who reportedly made hundreds of thousands of dollars a year at the company and bought a $1.5 million home in Parkland in 2004 — referred questions to his lawyers, who said the company was innocent. They blamed changes in FTC regulations prohibiting the collection of advance fees for the company’s inability to offer refunds.

“Our client engaged in no fraud, no evidence of deceptive trade practice issues and certainly no ill-will toward its customers,” attorney Robby Brinbaum he wrote in a July email to the attorney general. “Boulahanis has worked tirelessly trying to satisfy customers, but the money is just not there.”

The attorney general’s request that United Financial Systems provide refunds to customers who are still owed money is part of an ongoing civil investigation into the company, which moved out of its Margate offices in July. However, no agreement has been finalized. Another credit card debt relief business with Boulahanis at the helm, Capital Debt Relief, is also under civil investigation by Florida’s attorney general for similar allegations.

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Mortgage debt relief and credit card debt relief are the most common types of scams that target financially distressed consumers, according to the Federal Trade Commission (FTC).

In these scams, desperate consumers are often told that they can have mortgage payments significantly reduced or credit card debts slashed and settled for far less than what is owed — if the price is right. The con artists typically charge thousands of dollars in advance fees before they lift a finger to help consumers, and often continue to charge monthly service fees while consumers’ bills mount and go unpaid on instructions from the debt relief provider. And, as is often the case, consumers never receive any debt relief service for their payments and frequently end up in worse financial shape than when they started.

The FTC refers to these practices as “last-dollar frauds” because the scammers specifically target consumers who are severely financially troubled. In fact, David Vladeck, director of the FTC’s bureau of consumer protection, said that the “single factor that is the best predictor that someone will be a victim of fraud is financial insecurity.”

Last-dollar fraud has increased since the financial meltdown began, fed by growing consumer desperation brought on by the recession. However, the FTC has been cracking down on last-dollar-fraud. Every week, it seems, another debt relief, debt settlement, or debt collection company is being sued and shut down for breaking the law.

Two FTC Rules Protect Debt Relief Customers From Advance Fee Schemes

The FTC has been especially targeting operations for violating two new rules the commission instituted to help fight con artists, protect consumers from handy over money in exchange for empty promises, and recover damages for scam victims (“Down to Your Last Dollar? Don’t Let Con Artists Take it From You,” The Washington Post, Oct. 15, 2011).

Under the Mortgage Assistance Relief Services Rule, companies offering mortgage debt relief services, including mortgage loan modifications, are prohibited from collecting any fees until they provide a written offer from the lender or servicer — which must fully describe the proposed changes to the mortgage — and the consumer accepts.

The FTC also amended the Telemarketing Sales rule to ban companies that sell debt relief services over the phone from charging advance fees before they successfully settle or otherwise reduce a consumer’s credit card debt or other unsecured debt. However, the ban only protects consumers who enrolled in a debt relief program after Oct. 27, 2010.

While the FTC says it has made progress, it admits that there is still a long way to go when it comes to protecting consumers in financial distress. “As long as the economy is sluggish and struggling, fraud artists are going to be concentrating on people vulnerable in the downturn,” Vladeck said. “I think we are having an impact. Are we draining the swamp of these guys? No, we are not.”

In addition to mortgage debt relief fraud and credit card debt relief fraud, the FTC has identified credit card interest-rate reduction fraud, investment seminar and precious metal schemes, government grant fraud, work-at-home scams, and other credit card and line-of-credit scams as the most common last-dollar scams in the U.S.

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As the economy struggles and bills pile up, consumers are piling on credit card debt while eschewing credit counseling, debt management, debt settlement, and other debt relief programs that offer to help consumers get their finances back in order, according to a new study.

The study, by CardHub.com, found that while poverty has increased and unemployment continues to hover around 9 percent, consumers racked up $18.4 billion more in credit card debt in the second quarter this year that they did in the first quarter. That’s a steep 66 percent increase from a year ago and a whopping 368 percent from two years ago.

At the same time, fewer consumers are seeking debt help, relying instead on their credit cards to bail them out, at least for the short term. It’s a trend that troubles Gail Cunningham, spokeswoman for the National Foundation of Credit Counseling. “People need help more than ever, but they are not coming to us,” Cunningham said. “I think some are just tired of trying and have given up” (“Fewer People in Debt Trouble Seeking Counseling, Other Help,” USA Today, Oct. 12, 2011).

According to the study, the number of people who went to a credit counselor last year fell 20 percent from 2009, and the downturn has continued so far this year. Additionally, 38 percent fewer consumers signed up for a debt repayment plan at the Association of Independent Consumer Credit Counseling Agencies (AICCCA) during the first half of the year compared with 2010. And the number of consumers who filed for bankruptcy protection to escape debt is down 10 percent from the same period last year. However, the decline in bankruptcies may not be surprising since there’s no point in filing for bankruptcy if people have no income and no assets, according to University of Illinois law professor Robert Lawless.

The real reason that more people may not be seeking debt relief may be because of the costs involved. Even though new Federal Trade Commission rules prohibit debt relief companies from charging advance fees for debt settlement services, consumers still have to pay a portion of the amount of debt settled, as well as a service fee, once a settlement with creditors is reached. “Now consumers are saying they can’t even afford a debt-settlement payment,” said Andrew Houser, CEO of Freedom Debt Relief and a board member of the Association of Settlement Companies.

Dave Jones, president of AICCCA, attributed the drop in the number of consumers seeking debt help to a worsening economy that has deepened consumers’ struggles. “There is a huge segment of the debt-burdened population that is teetering on the edge of bankruptcy,” Jones said.

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Arizona home values have fallen so much that almost half the people with mortgages owe more than their homes are worth. Despite a state offer to reimburse banks up to $50,000 of a $100,000 principal loan reduction to help homeowners stay afloat, most banks balked, including the nation’s two largest home loan guarantors, which flat out said no to any debt relief offer.

In fact, Fannie Mae and Freddie Mac opted out of the state-sponsored mortgage debt relief program, saying that the agency’s policies forbid them from participating. As a result, only three Arizona homeowners have been approved for a principal debt reduction since the program began in Sept. 2010.

Although many, including sate attorneys general who are negotiating a multibillion-dollar settlement with big banks over fraudulent mortgage practices, believe that mortgage loan principal reduction has become an indispensable tool for fixing the housing problem, Fannie Mae and Freddie Mac disagree. The taxpayer-owned agencies say debt relief for homeowners is bad for business and, as a result, bad for taxpayers.

Critics claim the response is another example of how banks and investors have benefitted from the government bailout after the housing collapse while borrowers have been left to drown.

“It’s sinful, is the word I would use, that they won’t do this,” said John Taylor, president of the National Community Reinvestment Corporation. “And the only reason they won’t is they don’t want to realize the red ink that’s already on their books.” Taylor and others claim that Fannie Mae, Freddie Mac, and other lenders that have opted out of debt relief programs in Arizona and elsewhere are only delaying inevitable losses on loans that were shaky to begin with (“Freddie and Fannie Reject Debt Relief,” The New York Times, Oct. 5, 2011).

Large Lenders: Debt Relief Involving Principal Reduction Invites “Moral Hazard”

Lenders claim that if they were to offer debt relief to borrowers, it would create a “moral hazard” and encourage borrowers to take out risky loans in the future because there would be less dangerous consequences or to purposefully default on their mortgage loans to get principal reductions.

Proponents of principal reductions say any mortgage debt relief, such as a mortgage loan modification, that fails to reduce the principal of the loan isn’t helping the continuing housing problem. At least one financial company, PMI Group, which shares the credit risk in many Fannie Mae and Freddie Mac loans, thinks that debt forgiveness makes financial sense because it gets loans down to realistic numbers that encourages the normal buying and selling of homes and shortens the pain involved in delaying a hit from bad loans. The company has found a way around Fannie Mae and Freddie Mac’s policy to deny principal reductions by paying some underwater homeowners if they make on-time payments for several years, a practice that amounts to a de facto principal reduction.

Steve Bailey, chief servicing officer at PennyMac, said that the failure to offer debt relief by cutting principal creates a moral hazard, not the other way around.

“A loan that is modified and left at 200 percent loan-to-value invites the moral hazard,” Bailey said. “You’re telling a person that they need to live in this house that’s severely underwater, paying more for housing than they need to, and looking around their neighborhood at homes that have gone through foreclosure and are available for much less.”

Nationwide, about one in five homeowners with a mortgage is underwater, with total negative equity between $700 billion and $800 billion.

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The U.S. Federal Trade Commission (FTC) announced last week that two related mortgage debt relief operations that allegedly failed to provide financially troubled consumers with promised credit card debt relief services, mortgage loan modifications, and other mortgage relief assistance services have been shut down.

A U.S. district court agreed to the FTC’s request to halt the operations of Residential Relief Foundation LLC, Silver Lining Services LLC, Mitigation America LLC, and their principal owners for together allegedly scamming customers out of more than $11 million.

The Residential Relief Foundation and Silver Lining Services defendants allegedly charged clients a $1,495 advance fee for mortgage modifications that consumers could have applied for at no cost through the federal Home Affordable Modification Program (HAMP), which encourages loan servicers and investors to modify mortgages to lower the monthly payment of homeowners who are at risk of default.

The defendants, who used a logo similar to the Great Seal of the United States to market their purported debt relief services, allegedly claimed quick results and a high success rate, advised consumers to stop making mortgage payments, and falsely claimed that reports they created would ensure promised results. The defendants also allegedly marketed credit card debt relief services that falsely promised consumers they could eliminate 50 percent of the credit card debt owed and allow consumers to become debt free in 12 to 36 months. Additionally, the defendants allegedly disposed of client’s personal information in unsecured dumpsters, in violations of the defendants’ own privacy policies.

Mitigation America, the second operation halted, allegedly deceptively marketed debt relief services for Residential Relief Foundation and Sliver Lining Services. The company also allegedly discarded consumer’s personal information in unsecured dumpsters in violation of its privacy policy (“At FTC’s Request, Court Shuts Down Deceptive Mortgage and Debt Relief Operation,” FTC press release, Oct. 4, 2011).

Under the terms of the settlement agreements, Residential Relief Foundation, Silver Lining Services, and their owners are banned from participating in the mortgage assistance and debt relief industries. The defendants must pay a judgment of more than $10.5 million, the total amount taken from consumers in the scam. Another $1 million that the defendants still have from the scheme will be sought by a court-appointed receiver. A joint judgment against Mitigation America and its owner bans them from participating in the debt relief industry and includes a judgment of $509,306, the total amount taken from consumers in the scam.

Consumers who feel they have been the target of fraudulent, deceptive, and unfair business practices can file a complaint with the FTC in English or Spanish by calling (877) 382-4357 or by visiting the FTC’s online Complaint Assistant at www.ftccomplaintassistant.gov.

Further Reading

Stipulated Final Order for Permanent Injunction and Settlement of Claims: Federal Trade Commission v. Residential Relief Foundation, et al. Filed September 28, 2011.

Stipulated Final Order for Permanent Injunction and Settlement of Claims: Federal Trade Commission v. Mitigation America, et al. Filed September 28, 2011.

Complaint for Permanent Injunction and Other Equitable Relief: Federal Trade Commission v. Residential Relief Foundation, et al. Filed November 19, 2010.

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Homeowners facing foreclosure could gain a measure of debt relief from a proposal negotiated this week during ongoing settlement talks between banks and state attorneys general.

The proposal would allow banks to pay less in penalties for improper and sometime illegal business practices related to the financial crisis, including foreclosure and mortgage-related wrongdoing, in exchange for an agreement to cut the loan balances of mortgage holders.

The proposal comes as banks and a coalition of state attorneys general attempt to reach a settlement agreement as the result of investigations into widespread fraud and deception by mortgage lenders in the wake of last fall’s robo-signing and home foreclosure scandals. As a result of the scandals, banks were accused of falsely attesting in affidavits as to the nature and ownership of consumer debts and then using the fraudulent legal documents to improperly foreclose on borrower’s homes.

The proposed principal reduction plan would be joined by a second agreement that would require banks to provide funding to states to pay for their own foreclosure-rescue programs that would presumably to a better job of providing consumer with mortgage debt relief than the banks’ own programs, which have been severely criticized for failing to approve significant numbers of customers for permanent mortgage loan modifications.

However, the proposed settlement didn’t sit well with California Attorney General Kamala Harris, one of the eight state attorneys general representing the core team involved in negotiating the proposal. Harris said Friday that she was leaving the negotiating team because the proposal lets banks off the hook and doesn’t go far enough to punish lenders for their unethical and illegal business practices.

In a letter to Iowa Attorney General Tom Miller, who is leading the attorneys general group, Harris said that it “became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated. In return for this broad release of claims, the relief contemplated would allow too few California homeowners to stay in their homes” (“Principal Reduction Plan for Struggling Homeowners Could Be Part of Settlement Between Lenders and States,” The Palm Beach Post, Oct. 4, 2011).

Washington Attorney General Rob McKenna, one of the members of the negotiating team, disagreed with Harris’ evaluation of the proposal. “Our settlement will provide huge benefits — estimated in the tens of billions of dollars — for borrowers,” McKenna said. “The deal we are negotiating will not give banks a get out of jail free card.”

Representatives of the attorneys general, banks, and federal agencies met this week in Washington, D.C., to continue settlement negotiations.

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