Illinois Attorney General Lisa Madigan has filed lawsuits against two debt settlement companies for allegedly misrepresenting their services to consumers and failing to follow through on their obligation to settle their clients’ debts, according to a press release from the Illinois attorney general’s office (“Attorney General Madigan Sues Two Debt Settlement Firms,” May 4, 2009).

Madigan has charged debt settlement firms Debt Relief USA, Inc. and SDS West Corporation with violations of the state’s Consumer Fraud and Deceptive Business Practices Act, accusing the companies of deceptively marketing their services and of misrepresenting the impact those debt settlement services would have on clients’ credit.

According to one lawsuit, SDS West, along with its partner Nationwide Support Services, did not adequately inform its customers that their monthly payments would be applied to the company’s fees before the company would provide any of its promised debt settlement services — negotiations with a customer’s creditors for reduced payoff amounts. SDS West also failed to explain to its customers that they would have to make several months of payments before they would accumulate enough funds for the company to begin negotiating these settlement payoffs with the customers’ creditors.

In the second lawsuit, Madigan alleges that Debt Relief USA, which enrolled at least 470 Illinois customers in its debt settlement program between 2005 and 2008, did not “negotiate substantial reductions on most consumers’ accounts” and that most of its clients, having already paid the company’s nonrefundable fees, dropped out of the program before the company settled any of their debts.

Madigan is asking for permanent injunctions against both Debt Relief USA and SDS West that would prohibit them from engaging in debt settlement in the state of Illinois, along with court orders requiring each company to pay restitution, civil penalties of $50,000, and an additional $50,000 for each one of their violations that included intent to defraud.

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Hundreds of FBI agents and federal prosecutors could be hired to investigate the estimated 5,000 mortgage fraud claims that are reported every month if a new Senate bill becomes law, reports The Associated Press (“Senate Votes to Hire Hundreds More FBI Agents, Prosecutors to Tackle Mortgage Fraud Cases,” April 28, 2009).

“As foreclosures menace more and more hardworking homeowners, they become more desperate for help,” said Senate Majority Leader Harry Reid, D-Nev. “Unfortunately, schemers, swindlers, and scam artists are all too happy to pounce.”

To protect homeowners from such scams, the proposed legislation would allow the government to hire 160 special FBI agents dedicated to investigating mortgage fraud, along with 200 support staff. According to current data, despite the doubling of caseloads in the last three years, the FBI has fewer than 250 special agents devoted to financial fraud cases.

Under the proposal, the Justice Department would also be allowed to hire an additional 200 prosecutors and civil enforcement attorneys as well as 100 support staff.

Although the bill — sponsored by Sens. Patrick Leahy, D-Vt., and Chuck Grassley, R-Iowa — may end up costing more than $265 million a year for the next two years, supporters, including President Obama, say that the legislation would more than pay for itself, reports The Associated Press. Regulators anticipate that the large number of fines and penalties that would result from more aggressive government investigations would subsidize the new legislation.

If approved, the measure would go into effect beginning Oct. 1, 2009, and would cover the 2010 and 2011 budget years.

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Earlier this week, the government announced new provisions to Obama’s Making Home Affordable plan that will target homeowners with second mortgages who have not already been helped by the government’s foreclosure rescue plan, reports the Mercury News (“U.S. Revises Program to Help Homeowners Facing Foreclosure,” April 29, 2009).

“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system,” Treasury Secretary Timothy Geithner said in a statement (“Treasury Announces New Plan to Aid Mortgage Holders,” Bloomberg, April 28, 2009).

The administration’s second-lien program will build on Obama’s original mortgage rescue program by allowing homeowners who have their first mortgages modified under the plan to automatically have the payments reduced on their second mortgage, as long as their second-mortgage lender also participates in the government’s plan.

New Program May Help 2 Million Homeowners

Second mortgages have been a major stumbling block so far to alleviating the housing crisis, administration officials say.

About half of all troubled homeowners also have a second mortgage, usually in the form of a home equity line of credit, and these homeowners frequently run into a problem with lenders when trying to modify the terms of their primary mortgage. Oftentimes, the holder of a homeowner’s second mortgage refuses to grant permission to modify the first mortgage.

But with the new second-lien provisions in place, administration officials anticipate that another 2 million homeowners, especially those with second mortgages, will be able to avoid foreclosure, in addition to the 4 million homeowners projected to be helped under the original mortgage modification plan.

Expanded Incentives to Servicers, Homeowners

Servicers, lenders, investors, and homeowners could receive up to $2,450 in incentive fees through the new second-mortgage program, Bloomberg reports, if homeowners have their second mortgage modified in addition to their primary mortgage.

The servicers of second mortgages would pocket an upfront $500 fee as well as $250 per year for three years, for a total of $1,200 over the life of the modified loan. And as long as the homeowner remains current on the second mortgage, the government will apply $250 per year for five years to the principle of the first mortgage.

According to the Mercury News, the program also allows lenders to completely wipe out a homeowner’s second mortgage in return for a lump-sum payment from the government, which would be calculated based upon an undisclosed formula.

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More than 1,000 people have been defrauded out of a total of $70 million after getting involved in a massive mortgage fraud scheme operated by Metro Dream Homes, a company that promised to pay off the mortgages of people who invested a minimum of $50,000 in Metro Dream Homes (more…)

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In response to the rising number of mortgage scams in his state, Missouri Attorney General Chris Koster announced a “zero tolerance” policy for companies engaging in misleading mortgage refinancing practices, according to press release from Koster’s office (“Attorney General Koster declares ‘Zero tolerance’ on Mortgage Scams,” April 20, 2009).

“This Attorney General’s office will have zero tolerance for any mortgage broker or refinancing lender that uses deception to lure consumers into doing business with them,” Koster said. “The Attorney General’s office will use all its powers to investigate and prosecute businesses that use deception and fraud in advertisements to Missouri consumers.”

Under the new campaign, Koster has already sued two businesses, Goldstar Home Mortgage and Oxford Lending Group, for sending misleading direct mail advertisements to consumers that encouraged homeowners to refinance their home loans.

Goldstar’s mail piece included the name of the homeowner’s bank at the top of the letter, which Koster argues made the homeowner’s own bank appear that it was encouraging homeowners to refinance with Goldstar. The company also marketed loans that were “inappropriate” for homeowners — loans that, in at least one case, would have left the homeowner with a mortgage worth more than the home itself.

Oxford Lending’s direct mail pieces stated that homeowners had a special opportunity to refinance under the “Economic Stimulus Act of 2008.” Oxford also used the U.S. Department of Housing and Urban Development’s label and name to suggest that the letter was coming from the government and not Oxford.

Koster warned Missouri homeowners to be cautious of any mail having to do with mortgage refinancing, loan consolidation, mortgage modification, and foreclosure relief. With interest rates at historic lows and foreclosures at record highs, Koster says homeowners, seniors in particular, who looking to save their homes are particularly vulnerable to these mortgage scams.

“Increasingly, mortgage brokers are using deceptive ploys to draw Missourians back into the refinancing game,” Koster warned. “Our goal is to alert consumers that these scams are out there and to sue every mortgage broker who crosses the line.”

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Seeking to clamp down on mortgage fraud, Sen. Charles Schumer of New York has asked the Obama administration for $100 million to help regional prosecutors combat the nationwide mortgage fraud problem (more…)

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With the economy tanking, credit card companies are hoping consumers will bail them out in more ways than one. Taxpayers have already sent millions of their own dollars to card companies as part of the federal bailout. But now consumers are being asked to pick up the tab for card companies’ tanking balance sheets. (more…)

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California’s unemployment rate hit a record 11.2 percent in March, leaving 2.1 million people jobless — the highest level since World War II, according to a report released last week (“State Unemployment Rate Highest Since 1941,” San Francisco Chronicle, April 18, 2009).

The March figure surpasses the 11 percent unemployment rate the state reached during the early 1980’s recession, says Patti Roberts, spokeswoman for the state’s Employment Development Department. The March unemployment rate approaches the 11.7 percent unemployment rate the state had in January 1941.

While last month’s unemployment rate for the state was significantly higher than the national figure of 8.5 percent for March, California had the 4th highest rate of unemployment in the country, perhaps due to the decline in real estate.

“California’s higher rate of job loss is primarily the result of greater exposure to the housing downturn,” said Stephen Levy, director and senior economist at the Center for the Continuing Study of the California Economy in Palo Alto.

Forecasters Vary on Outlook

The unemployment rate is grim and many Californians have been affected by job losses, “But on the other hand things are not really as bad as you might think,” said Chris Thornberg of Beacon Economics, a California real estate and economic forecasting firm.

Thornberg believes that these job losses can be attributed to the slump in consumer spending over the last year, and sees spending starting to stabilize in the near future along with the job market.

But Jerry Nickelsburg, an economist with the UCLA Anderson Forecast, believes that in all likelihood, the job market will continue to get worse before it gets better. He predicts California’s jobless rate will reach a high of 12 percent before it begins to decline sometime in 2010.

“Unemployment will likely creep up through the end of the year,” Nickelsburg said, “because employers will want to see that the increase in demand is strong before they hire.”

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William Spellman, a 44-year-old IT professional from Indianapolis, has come to the realization that the old adage “what goes around, comes around” isn’t true in today’s recession. Spellman has been repeatedly denied a loan for his daughter’s summer school classes by some of the very banks who have been bailed out by his tax dollars, ABC News reports (“Banks Take Billions From TARP, but Give Fewer Loans,” April 21, 2009).

“They need my help, but now they’re unwilling to help me,” Spellman said.

The 21 banks receiving the most bailout money from the Troubled Asset Relief Program made or refinanced 23 percent fewer loans in February than in October when TARP funds were first distributed, according to Treasury Department numbers. And excluding mortgage refinancing, consumer lending amongst these banks fell by one-third during that same time period, both of which suggest that “jawboning by federal officials for banks to use TARP funds to boost lending is having a limited effect” (“TARP Cash Isn’t Moving Forward,” The Wall Street Journal, April 16, 2009).

Banks Say They’re Lending, Just Not As Much As Anticipated

Investigators for the Congressional Oversight Panel on TARP, the independent agency that’s in charge of analyzing how banks are spending their $200 billion in government funds, suggest that consumers like Spellman shouldn’t be so quick to write the bailout off as a failure just because they haven’t personally seen a change in lending.

Neil Barofsky, the Treasury’s special investigator for TARP, said the program has allowed banks to lend more than they would have been able to without the government assistance but that banks just haven’t increased lending as much as the government had hoped.

“A lot of banks have indicated that because they received the TARP funds, they were able to maintain or not reduce lending as much as they would have otherwise,” Barofsky said.

Banks Say Slack in Lending Is Out of Their Hands

Bank executives contend that they haven’t been able to expand lending to meet government and consumer expectations because demand for loans is down.

“I think one of the huge misconceptions out there is that banks aren’t lending,” said JPMorgan Chase CEO Jamie Dimon. “The lending balances are up and down based on demand…”

Dimon also pointed out that the non-bank lenders that have accounted for 75 percent of all lending have all but disappeared in this recession. Now-defunct lending giants Bear Stearns and Lehman Brothers created a huge lending void when they folded, taking their large balance sheets and capital out of the financial markets. Wachovia and Washington Mutual also stepped out of the picture when they failed and were consumed by other banks.

Financial experts, on the other hand, attribute this slack in lending to the simple fact that lenders’ fear of rising consumer defaults have changed the way they lend; a good credit score is no longer enough to secure a line of credit. To this end, banks are tightening their lending restrictions and, before they issue any new loans, are analyzing consumers’ debt-to-income ratios and looking at how efficiently consumers pay off their debts, in addition to just looking at credit score.

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Foreclosures — already up 24 percent during the first quarter of 2009 — are poised to climb even higher as major lenders initiate a new round of foreclosures after a temporary moratorium, the Associated Press reports (“Foreclosures Up 24 Percent in First Quarter as Temporary Halts Expire,” April 9, 2009).

Many lenders including Freddie Mac and Fannie Mae agreed to temporarily halt foreclosures for several months in advance of Obama’s “Making Home Affordable” plan, which began in early April and may end up helping as many as 9 million homeowners avoid foreclosure through mortgage modifications or refinancing.

Obama’s plan comes too late for nearly 200,000 homeowners who had their homes repossessed by banks last quarter, according to RealtyTrac, a foreclosure data service. Nationwide, 804,000 homeowners received a foreclosure notice last quarter, a 24 percent increase from the same time period in 2008.

Foreclosures May Worsen Before They Get Better

More than 340,000 properties received at least one foreclosure notice in March alone, a 17 percent hike over the previous month and a whopping 46 percent increase over the previous year..

In March, foreclosures “came back with a vengeance” and are likely to keep rising, said Rick Sharga, senior vice president of marketing at RealtyTrac.

Shaun Donovan, Obama’s housing secretary, says that he expects there to be a further increase in foreclosures in coming months. Donovan speculates that these foreclosures may be on second homes, investor-owned properties, or vacant properties abandoned by homeowners who owed more on their mortgage than their home was worth.

However, Donovan is optimistic that the nation could see a decline in foreclosures beginning this summer.

Success of Government Program Questioned

Despite government optimism that the Obama administration’s foreclosure rescue program would help stem the tide of foreclosures, industry executives say that the plan’s success is ultimately dependent on how well it is received by lenders. So far, lenders have yet to embrace the voluntary program despite $75 billion in government incentives to modify loans.

“The effectiveness of the plan overall obviously is going to depend on the level of industry participation,” said Paul Koches, general counsel of Ocwen Financial, a mortgage loan servicing company.

Currently, homeowners say that lenders aren’t granting enough loan modifications and that the modifications don’t do enough to help struggling homeowners, despite repeated prodding this past year by regulators, reports AP. According to data released last month, less than half of all loan modifications made at the end of last year resulted in reducing a homeowner’s mortgage payments by more than 10 percent.

While homeowners say mortgage modifications don’t go far enough, lenders say they have their hands full and are swamped with calls from distressed homeowners who need help avoiding foreclosure.

“You can’t wave a magic wand and make the loans suddenly modified,” said Sharga of RealtyTrac. “They’re all individual transactions.”

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