In Arizona, foreclosure-rescue scams have skyrocketed 30 percent in the past few months, Arizona Attorney General Terry Goddard revealed at a recent meeting of the Arizona Foreclosure Prevention Task Force (“Foreclosure Scams on the Rise,” The Arizona Republic, May 20, 2009).

“Firms are contacting homeowners on the verge of foreclosure, offering help and instead taking the money the homeowner has,” Goddard said. “We have a real obligation to find these people and prosecute them.”

New foreclosure-rescue scams have arisen under the federal government’s mortgage loan modification plan that began in March, in which lenders work with homeowners who are at risk of losing their homes to reduce the interest rate or principal on a mortgage in an effort to help these homeowners avoid foreclosure. The federal program was recently expanded to assist homeowners who previously didn’t qualify for mortgage loan modifications due to the fact that they owed more on their home than what the home was worth.

Just-released data shows that mortgage companies have made more than 55,000 offers to modify mortgage loans since the government mortgage modification program’s March inception date, according to The Arizona Republic. Currently, 14 companies, which service 3 out of every 4 of all U.S. mortgages, have signed up to do mortgage modifications under the new government plan.

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“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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In exchange for homeowners’ investments, the company promised to pay off the mortgages of any investors enrolled in its Dream Homes Program within five to seven years using revenue generated from the company’s said-to-be-profitable side business ventures, including ATMs, electronic kiosks, and paid advertisements on flat-screen televisions.

Investors, some of whom learned of the program during presentations held at luxury hotels in Washington, D.C., and Beverly Hills, Calif., were never told that their investments were being used instead to pay for Metro Dream Homes executives’ salaries, some as high as $200,000 (“Five Charged in $70 Million ‘Dream Home’ Mortgage Fraud Scheme,” United States Attorney’s Office District of Maryland Press Release, April 27, 2009)

The company also used investor funds to pay for a fleet of chauffeured luxury cars for company employees as well as for executives’ trips to the 2007 Super Bowl and to the 2007 NBA all-star game. And in some cases, the company used the millions of dollars it received from new investors to make the mortgage payments of previous investors, according to the press release.

Five Face Fraud Scheme Charges

A federal grand jury has indicted four defendants in the fraud scheme and has brought a pending case against a fifth defendant. Charged in the case are Andrew Williams Jr., the founder and owner of Metro Dream Homes; Michael Hickson, chief financial officer; Isaac Smith, president; Alvita Gunn, vice president of operations; and Carole Nelson, chief financial officer of a related company.

“IRS Criminal Investigation takes allegations of mortgage fraud seriously,” said Eileen Mayer, head of the IRS’ criminal investigation division. “These types of crimes drive homeowners into foreclosure, erode the integrity of our tax system, and threaten the financial health of our communities.”

To combat the growing problem of mortgage fraud, federal, state, and local agencies have formed 18 mortgage fraud task forces.

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Schumer’s proposed legislation would give local prosecutors federal grants to bring individuals or organizations engaged in fraudulent activities to court. Prosecutors, already burdened with heavy caseloads, often don’t have the manpower to prosecute mortgage fraud crimes because “the cases are very labor intensive” and “involve paper trails that require a lot of prosecutors and analysts,” Schumer said during a press conference in New York City.

The thousands of troubled homeowners who are at risk of losing their homes are vulnerable to these scams offered by companies promising to help them avoid foreclosure, says Daniel Donovan Jr., district attorney of New York’s Richmond County, “Some families already facing foreclosure desperately turned to scammers offering financial relief, only to wind up in a worse-off situation.”

Mortgage Fraud Jumps 50 Percent

Nationwide, the number of mortgage fraud cases doubled in the first quarter of this year compared to the same time period last year, according to Mortgage.com’s FraudBlogger Index, a measure of mortgage fraud case activity (”Florida Ranks No. 3 in Mortgage Fraud,” South Florida Business Journal, April 27, 2009).

In Florida – ranked third in the nation for the amount of mortgage fraud activity seen this first quarter – mortgage fraud is so rampant that the state’s attorney general, Bill McCollum, has created a mortgage fraud task force. The task force already has more than 50 active investigations and at least a dozen pending lawsuits, including six that were filed under the Foreclosure Rescue Fraud Prevention Act, according to the attorney general’s website.

But of the $1.5 billion in mortgage fraud cases nationwide, the most notable cases haven’t been confined to Florida:

• A mortgage broker in Maryland used some of the proceeds from originating more than $30 million in fraudulent loans to pay for her $800,000 wedding, headlined by Patti LaBelle.
• A California mortgage broker, who admitted to originating $1 billion in fraudulent home loans in six states, was caught at the Canadian border with $70,000 stuffed into his boots.
• A Texas woman was convicted and sentenced to 99 years in prison for being the ringleader of a $3 million scheme involving her family. Her husband, sister, and daughter were also indicted.

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The study revealed that consumers are also more likely to default on their home loans if their home values plummet than if their mortgage terms are unfavorable. That finding led Boston Federal Reserve economists to conclude that policies directly aimed at providing aid to unemployed homeowners may be more effective at helping homeowners avoid foreclosure than the loan modification and refinance policies outlined in President Obama’s home rescue plan.

Under the government plan, certain homeowners who are underwater on their mortgages would be able to get a government-subsidized mortgage loan modification through their lender, while other homeowners who have little or no equity would be able to refinance their home loans.

“Foreclosure-prevention policy should focus on the most important source of defaults” including unemployment, the economists wrote in the study.

They said that homeowners would be better served by a government plan that supplements an unemployed homeowner’s lost income with loans and grants, though the report didn’t outline details for this type of strategy.

Government Program Questioned

Although government officials believe that the housing crisis can be attenuated, “by changing the terms of ‘unaffordable’ mortgages,” Boston Federal Reserve economists point out that policies targeting the modification of home loans “face important hurdles in addressing the current foreclosure crisis.”

Chief among those hurdles is how effective Obama’s loan modification program will be at preventing foreclosures and how many homeowners will actually be able to refinance their homes at today’s record-low interest rates in one of the most stringent credit markets in years.

While the Obama administration estimates that the loan modification plan will help around 9 million homeowners stay in their homes and that some 7 to 9 million homeowners may be eligible to refinance, both options may end up helping far fewer homeowners than expected.

In order to refinance, homeowners must owe no more on their mortgage than 5 percent more than what their home is worth and those homeowners trying to modify their mortgages must still have enough income to make a reduced loan payment to qualify.

Hundreds of thousands of homeowners who reside in Nevada, Florida, Michigan, and Arizona — where property values have plummeted by as much as 45 percent — won’t qualify for the government loan modification program. They may, however, benefit from the unemployed homeowner plan highlighted in the Boston Federal Reserve report, if it ever becomes reality.

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Most recently, the Better Business Bureau of Northern California has issued warnings to homeowners about the Roseville-based company ShortRefiNow.com, an unlicensed loan modification organization that has reportedly stolen thousands of dollars from struggling homeowners.

Kris Pinkney, one of ShortRefiNow.com’s clients, gave the company $3,000 upfront to modify her mortgage. When she contacted her lender later to see how the modification was going, her mortgage holder told her that ShortRefiNow.com called and asked a single question: “How do you do a refinance?”

When Pinkney attempted to follow up with ShortRefiNow.com about her mortgage modification, she got the runaround. “They said, ‘I’m not sure who’s taking care of it. The person taking care of it had emergency surgery,’ ” Pinkney said. “I knew — you know when someone’s lying.” Eventually, Pinkney did get a portion of her $3,000 payment back from ShortRefiNow.com.

Other homeowners weren’t as fortunate. According to the BBB, 14 other individuals who filed complaints against the company and paid between $2,600 and $5,300 upfront to have their mortgages modified never received the promised services or any payment refunds.

In February, the California Department of Real Estate issued a Desist and Refrain Order against ShortRefiNow.com, demanding that the company stop performing any and all acts requiring a real estate license until the company obtains that license, KCRA reports.

Although ShortRefiNow.com assured KCRA that in response to the order they were looking for attorneys to address their client’s claims, it now appears that ShortRefiNow.com has vacated its office.

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“Scam artists have sunk to a new low and are using the forged letterhead of lenders to con worried Californians into handing over their hard-earned money,” Brown said. “Californians should be deeply skeptical of anyone who demands money up front and makes extravagant promises that they can save their home.”

The warning from Brown comes shortly after the arrest of Anna Santos of North Hills, Calif., who was charged with money-laundering, conspiracy, and four counts of grand theft for the part she played in a loan modification scheme that stole $700,000 from homeowners.

Under First Gov, a fraudulent mortgage modification company, Santos and others solicited hundreds of homeowners by mailing them flyers that appeared to be from their lender or the government. The flyers, which featured large headers with the words “Final Notice,” falsely promised homeowners that they would receive mortgage modifications to stop foreclosure on their homes in exchange for upfront fees ranging from $1,500 to $5,000.

Once homeowners provided their mortgage information to Santos’ company, they received a “confirmation” letter and other documents that led them to believe that their mortgage lender had been notified of their mortgage loan modification.

When homeowners complained that they were still receiving foreclosure notices from their lender, homeowners were told that their mortgages had finally been renegotiated, but that their lenders needed further “good faith” payments to secure the new terms of their mortgage.

Homeowners were then instructed to submit their payments, in the form of money orders or cashier’s checks, to the fictitious “Payment Processing Department.”

None of these payments, however, were credited to homeowners’ mortgage loans, according to the news release. Instead, Santos deposited the funds into the fraudulent company’s bank accounts and then transferred the money to others involved in the mortgage modification scheme.

Many victims lost more than $6,000 in the scam before the attorney general stepped in and put an end to the group’s criminal activities.

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“Our Homeowner Unemployment Assist program is intended to serve as a bridge toward a longer-term solution, helping homeowners stay in their homes and in their communities while they get their feet back on the ground,” said Sanjiv Das, CitiMortgage chief executive.

According to the AP, unemployed homeowners must meet certain qualifications to be considered eligible for assistance under the new program:

• Be 60 days or more past due on their mortgage, or be in foreclosure
• Have the financial resources to make the reduced monthly payments
• Have a primary residence with a first mortgage that is owned and serviced by CitiMortgage Inc.
• Have a home loan that meets the general conforming loan limit established by the government, which, in most U.S. markets, is currently is set at $417,000
• Meet all insurance and guaranty requirements

Homeowners who take part in the three-month program but are still without jobs after its completion will have their home loan situation examined by Citigroup to determine the best payment option. Participating homeowners who find employment during those three months may opt to return to their original payment schedule, or, if qualified, may ask Citigroup for a mortgage modification.

Citigroup expects that the new initiative will help thousands of homeowners over the next two years and that the new program may be expanded, after initial evaluations, to include homeowners who have just recently fallen behind on their payments and those who are current on their mortgage but in danger of falling behind.

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The bill, which could be approved by the Senate as early as next week, was voted on just as the Mortgage Bankers Association released a survey showing that a staggering 5.4 million U.S. homeowners – nearly 12 percent – were at least one month behind in their mortgage payments or already in foreclosure (”House OKs Court-Approved Mortgage Relief,” Los Angeles Times, March 6, 2009).

Judges already have the authority to reduce the principal on loans backed by other assets, including second homes, cars, and boats, but supporters of the bankruptcy law change – a provision of the House’s Helping Homeowners Save Their Homes Act – say that allowing bankruptcy judges to “cram down” the mortgage principal a homeowner owes on their primary residence would help more families to keep their homes.

“This is the same opportunity that owners of vacation homes, investment properties, private jets [and] luxury yachts have long enjoyed,” says Rep. Zoe Lofgren, D-Calif. “I think it’s only fair that we offer it now to average families as well.”

Supporters also believe, the threat of a “court-ordered” reduction in loan principal could induce mortgage lenders to voluntarily perform more mortgage modifications – modifications that financial institutions have largely been unwilling to make despite lender incentives offered through the government’s Homeowner Affordability and Stability Plan.

But opponents of the cramdown bill contend that it could make the mortgage crisis worse. The measure could make filing for bankruptcy too easy for homeowners and could lead to a flood of Chapter 13 bankruptcy filings.

“The bill makes bankruptcy a first choice and not a last resort,” says Steve Bartlett, president of the Financial Services Roundtable, a coalition of large financial institutions.

The measure would not only undermine ongoing efforts to modify loans but also “punish those who played by the rules and lived within their means,” says Rep. Mike Pence, R-Ind. “Rewarding bad behavior will not solve our problems, it will only worsen them.”

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The proposed legislation, which would alter the current U.S. Bankruptcy Code and give bankruptcy court judges the power to provide mortgage relief to homeowners, will soon be debated by lawmakers in the House of Representatives.

Under the bill, judges could reduce the principal of the mortgage loan, extend the loan terms, or reduce the interest rate for families who have “run out of other options.” These judicial modifications would be limited to primary residences with mortgages owned or serviced by the government-owned lenders Fannie Mae or Freddie Mac.

“At a time when an estimated 6,600 American families are losing their homes to foreclosure every day, we welcome the Obama administration’s support for changes to existing bankruptcy laws that will allow for judicial modification of home mortgages,” said Cary Ebert, president of the National Association of Consumer Bankruptcy Attorneys.

“The Obama administration is the latest major player in this national debate to recognize the fact that judicial modification must be part of the solution to today’s worsening home mortgage foreclosure crisis,” she said.

New Law Could Help Homeowners Avoid Bankruptcy Court

Those who oppose the bill, referred to as “cramdown” legislation, say it would force lenders to accept loan modifications made by bankruptcy judges without being able to offer their own input. Lenders claim that it could increase their losses, which would be passed on to borrowers in the cost of future home loans.

“We are disappointed to see the president endorse bankruptcy as a means to help delinquent borrowers,” said David Kittle, chairman of the Mortgage Bankers Association.

Supporters contend that the legislation could be just what is needed to force lenders to start aggressively modifying mortgages and prevent hundreds of thousands of homeowners from ending up in bankruptcy court.

According to Samuel Gerdano, executive director of the American Bankruptcy Institute, there’s a good chance that the bill will go through.

“Economic circumstances have changed for the worse, and by all accounts, they’re going to continue to get worse,” Gerdano said. “The environment is such that politically and economically, the odds have never been better than now.”

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