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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In one of the largest collection awards ever granted by a jury, a California couple has been awarded $500,000 in damages for being harassed and threatened by the debt collection agency Credigy Services Corporation, reports insideARM (“Jury Awards $500,000 to California Couple in FDCPA Case,” May 5, 2009).

Under the Fair Debt Collection Practices Act, which protects consumers against abusive collections tactics by debt collectors, Manuel and Luz Fausto were awarded $100,000 for actual damages and $400,000 in punitive damages, granted by a jury for “malicious and reckless disregard of the couple’s rights.”

The award stems from a dispute over the couple’s Wells Fargo charge card debt they thought they had paid off in the late 1990s, said the Faustos’ lawyer, David Humphreys of Humphreys Wallace Humphreys, P.C.

During the mid-1990s, the couple realized that their credit card balance was continuing to rise even though they were making payments on their account, but a local Wells Fargo branch denied their request to have the account frozen.

To resolve the situation, the Faustos went to a local debt settlement company that promised to negotiate a payoff of the credit card balance. The couple thought the account had been paid off in the late 1990s, after they made two money order payments.

Then in 2006, the couple was contacted by Credigy with a demand to pay $17,000. Even after a cease-and-desist notice was sent to a Brazilian affiliate of Credigy, the debt collection company still made over 90 threatening calls and sent innumerable letters to the Faustos’ home.

Debt collection attorney Manny Newburger says the jury award in this case is one of the largest given to a consumer under the FDCPA, noting that usually “there is little or no evidence of actual damages presented by the consumer.” In this particular case, however, the Faustos were able to document the harassing nature of Credigy’s practices, including the company’s baseless threats, having recorded the last phone call from the collector.

Newburger believes that the verdict in the Fausto case was based largely on state legislation and doesn’t think that the size of the award will motivate more consumers to sue debt collection agencies in the future.

“I think this verdict is indicative of what this jury thought of this particular case,” Newburger said, “but not of anything else.”

Correction: May 8, 2009

This post has been revised to reflect the following correction: The original post mistakenly referred to the $500,000 jury verdict as the largest award conferred upon a consumer under the Fair Debt Collection Practices Act. In fact, the $500,000 decision is among the largest FDCPA findings on behalf of a consumer, but not the singular largest.

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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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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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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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Homeowners are more likely to lose their homes to foreclosure because they’ve lost their jobs than because their loan payments have become unmanageably high, according to a new study by the Boston Federal Reserve that is raising doubts about the effectiveness of the government’s new loan modification program (“Unemployment: Big Factor in Home Defaults,” Reuters, April 13, 2009).

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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