After having settled predatory lending charges with 42 states, Bank of America has modified more than 64,000 home loans worth $823.5 million in principal and interest savings, with the intention of modifying loans and reducing interest rates for up to 100,300 borrowers (more…)

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With more than 2.1 million homeowners estimated to lose their homes this year according to Moody’s projections, more and more homeowners nationwide are falling prey to mortgage modification scams promising to help homeowners retain their homes.

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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April marked the second month in a row that more than 300,000 troubled homeowners received foreclosure notices, a jump of 32 percent over the same time last year, reports The Associated Press (“April Foreclosures Up 32% Over Last Year, Report Says,” May 13, 2009).

According to foreclosure data service RealtyTrac, more than 324,000 homeowners received at least one foreclosure-related notice in April. One in every 374 U.S. housing units received such a notice last month, the highest monthly foreclosure rate since RealtyTrac began collecting data in 2005.

“We’ve never seen two consecutive months like this,” said Rick Sharga, senior vice president for marketing at RealtyTrac. “It’s the volume that’s surprising.”

Nevada, Florida, and California posted the highest rates of foreclosure of all states, with Arizona, Idaho, Utah, Georgia, Illinois, Colorado, and Ohio rounding out the other top 10 states in the nation. In Nevada, one in 68 homeowners received a foreclosure filing, compared to 1 in 135 in Florida, and one in 138 in California, RealtyTrac data showed.

Although the number of homes repossessed by banks was down by about 11 percent since March, RealtyTrac cautions that what seems to be good news may not be as positive as it appears. The decline in home repossessions is likely the result of widespread mortgage moratoriums implemented earlier this year, in which banks suspended foreclosure proceedings as they waited for the launch of the government’s new Making Home Affordable plan in April.

Now that many of those moratoriums have been lifted, experts project that home repossessions may soon go back to their previous levels.

Whether Obama’s housing plan will actually help the projected 9 million homeowners seeking debt relief through mortgage modifications or refinancing remains unclear, as initial reports by homeowners indicate that lenders have been extremely slow or unresponsive to homeowners’ attempts to take advantage of the government programs.

Homeowners on the brink of foreclosure fear that the government’s housing plan may not do enough to help them keep their homes and stem the tide of foreclosures.

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To keep renters from ending up on the street after their landlords have lost their property to foreclosure, the Ohio House has passed a bill that will help protect renters in the state from being victimized by the nation’s housing crisis, the Dayton Daily News reports (“House Bill to Guard Renters in Foreclosures,” May 6, 2009).

The legislation, which passed the state House last week by a narrow 53–42 margin and now faces Senate approval, requires landlords to give renters written notice of foreclosure within 60 days of when the court notifies the property owner of default.

If a foreclosed house has been sold, the bill specifies, the new owner or landlord must honor a tenant’s lease, which will automatically be converted to a month-by-month lease arrangement. The legislation also stipulates that landlords must give tenants a 21-day notice after a sheriff’s sale of a foreclosed property.

Republican Rep. Shannon Jones, who voted against the bill, said there was “much to like about the legislation,” but was worried that it would discourage investors from purchasing foreclosed properties since the bill would force investors to take on the previous owner’s tenant.

The bill’s chief co-sponsor, Democratic Rep. Ted Celeste, on the other hand, thinks the new legislation is a good idea, considering a third of the foreclosures in the state are on rental properties, according to the Coalition on Homelessness and Housing in Ohio (“Collateral Damage: Renters in the Foreclosure Crisis,” June 2008).

Celeste said, “Tenants who play by the rules … should never be penalized because of their landlord’s foreclosure.”

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Although many banks have already received their portion of the $75 billion the government has allocated for the new Making Home Affordable plan, some mortgage lenders are moving so slowly to modify homeowners’ mortgages through the plan that homeowners fear they could still lose their homes to foreclosure, National Public Radio reports (“Homeowners Find Loan Modification Slow Going,” May 7, 2009).

“I faxed my loan-modification application six times to the two banks and everybody keeps saying, ‘We didn’t get your application yet, we didn’t get your application yet,’” says Dorothea Wang, a California homeowner who hasn’t been able to pay her mortgage since January and is about to default on her home loan with Wells Fargo. Wang says she’s called and left several messages with the bank, but nobody ever returns her calls.

“Unfortunately, that’s a true story and I hear it all the time,” says Yolandra McClinton, a Los Angeles Neighborhood Housing Services counselor. McClinton says this has been typical of mortgage holders since they‘ve become overwhelmed with the large number of homeowners attempting to get their loan modified through government programs.

Wells Fargo just received its $3 billion subsidy from the government to help struggling homeowners like Wang, but according to Ed Delgado, senior vice president of default and retention operations at Wells Fargo Home Loans, his company has been busy getting up to speed with the new program.

It takes time to roll out the “decisioning” software that helps lenders determine if homeowners qualify under the new program, Delgado says. Lenders use the software, in part, to determine if homeowners actually live in their home and if they spend more than 31 percent of their gross monthly income on their mortgage payment.

Those customers who meet the eligibility requirements, Delgado explains, would typically have the interest rate on their mortgage reduced for at least five years under the government’s plan.

Many industry insiders including Lori Gay, president of the Los Angeles Neighborhood Housing Services, believe that lenders are just too busy dealing with foreclosures and don’t have the time to help homeowners with mortgage modifications.

“Are they ready to make this a massive program yet, or do they need three months to get their systems in place?” Gay asks. “This is where people get lost in the cracks.”

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In what may be the first statewide order of its kind, the South Carolina Supreme Court has temporarily suspended an estimated 5,000 pending home foreclosures to give homeowners more time to take advantage of a new government program that helps them refinance their mortgage, The Associated Press reports (“Top SC Court Halts Thousands of Foreclosures to Let Owners Refinance; May Be First in Nation,” May 5, 2009).

In March, the Obama administration announced a plan to help homeowners avoid foreclosure that would provide billions of dollars in incentives to lenders for modifying home loans.

As part of that plan, government–owned lenders Fannie Mae and Freddie Mac, the two largest mortgage holders in the nation, unveiled a flexible refinancing program that would assist homeowners in obtaining a lower interest rate on their mortgage and mortgage payments homeowners could afford.

South Carolina’s temporary mortgage suspension plan comes as a result of a request from Fannie Mae’s attorney, Ronald Scott, who argued that a temporary suspension of foreclosure sales was necessary to ensure that homeowners who qualify for the federal programs wouldn’t lose their homes before being able to take advantage of the program.

Under the court’s ruling, South Carolina judges will be prevented from finalizing foreclosure sales statewide on properties with mortgages held by Freddie Mac, Fannie Mae, or any other lender that is participating in a federal housing assistance program.

Mortgage experts say that the ruling may be the nation’s first court-ordered foreclosure stop for an entire state.

Freddie Mac spokesman Brad German said that this ruling, issued by a court that has statewide jurisdiction, is the first he’s heard of in the country. He said, “We’re not aware of anything like this, anywhere else.”

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Ohio Attorney General Richard Cordray has completely shut down one organization and subpoenaed 10 others suspected of running illegal foreclosure-rescue operations as part of the state’s effort to crack down on foreclosure prevention scams, according to a news release from the Ohio Attorney General’s office (“Cordray Puts Heat on Foreclosure Rescue Operations,” May 4, 2009).

Foreclosure Solutions, a Cincinnati-based foreclosure rescue company, solicited Ohio homeowners using direct mail marketing and promised homeowners the company could help save their homes, according to the judgment. Despite charging homeowners fees ranging from $750 to $1,300, Cordray says the company failed to provide any of the promised services, resulting in many Ohio residents losing their homes.

Cordray’s office has ordered Foreclosure Solutions to close down its operations and has forced owner Timothy Buckley to pay $225,000 in civil penalties and $79,565 in restitution for taking advantage of Ohio homeowners who were facing foreclosure.

“This is a textbook example of how these predators operate,” Cordray said. “They identify people who are in a vulnerable situation, persuade and manipulate them, and then take their money and run. It’s predatory and atrocious. We will not stand for it.”

The attorney general has also targeted 10 other companies suspected of running illegal foreclosure rescue operations in Ohio, the first part of a widespread investigation by the attorney general’s office into foreclosure rescue scams in the state.

Cordray’s office has issued 10 cease and desist orders requiring businesses to halt all predatory practices immediately. The Ohio attorney general has also subpoenaed those same organizations to produce documentation substantiating their current business practices.

“This is a strong, preventative measure to keep foreclosure rescue scammers out of Ohio,” Cordray said. “It is a warning shot announcing that we have no tolerance for these predatory practices in our state.”

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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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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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