Loan Modification Scam Categories Emerge
As the national foreclosure prevention campaign and other efforts mature, loan modification fraud is becoming more defined, increasingly falling into two categories.
And in both cases, it only takes a weak link in the mortgage-servicing process to open the door to thousands of dollars in losses.
Senior partner of Houston-based law firm Leyh & Payne, Bill Payne, says the new economic climate is making it easier for fraudsters to get away with two new mortgage scam variations.
The first type is conducted by people who look for borrowers that are getting notices of default and are on the road to foreclosure.
Fraudsters contact and then deliberately confuse these borrowers about their lender affiliation. A common impersonation is pretending to represent Countrywide, or simply avoid talking about their affiliation or lack thereof, offer to do a loan modification for a fee, start collecting payments and eventually disappear. To appear convincing they may even go so far as to mail fraudulent documentation so borrowers continue to pay and get further into default.
While more common, this type of fraud is harder to predict and stop. In a worst-case scenario borrowers would pay thousands of dollars and may not be able to find the culprits or solve the problem in a court of law.
The second “most popular” scheme used to attack vulnerable homeowners is by presenting a deceptive package of closing documents prepared by a fictional mortgage company. Homeowners are invited to sign forms that deed away their property in a location that appears like a legitimate office.
A variation on this type of scam is when fraudsters drag homeowners into it by making them participate in the deception. Fraudsters tell homeowners that for the loan modification to take place they must agree to tell the mortgage company the owner is going to lease the property even though the homeowner is not really going to lease the property. According to Payne, then they bring in “a straw man” who supposedly is the leaser and ask the borrower to make payments to this leaser who keeps the money.
Dissimilarities depend on how fraudsters prepare these transactions so close monitoring of borrowers, payment history and delinquency patterns is not enough. Payne says one of the best ways to minimize borrower and servicer fraud-related losses is to immediately contact delinquent borrowers and offer a workout option. This way “there is a chance” fraudsters will be restrained.
Leyh & Payne has represented borrowers who lost thousands of dollars to con artists posing as home loan modification companies and warns that record numbers of distressed homeowners have created a breeding ground for such fraud.
Loan modification fraud cases, which have been recorded mostly in states that were hit the hardest by the foreclosure crisis such as Nevada, Florida or California, are now spreading out. Payne says his firm has seen a jump in loan modification fraud in Texas.
Despite national efforts to provide financial education the main reason is that many borrowers still do not know that only the lender can ultimately approve a modification. Furthermore, the amount of mortgage documents and forms presented to the borrower now, Payne says, is so overwhelming most “don’t take the time to read them, or if they do, often do not understand them.”
Fraudsters are taking advantage of mortgage processing loopholes to scam homeowners in need of a modification. And as a rule lender-servicers will find out and face the financial and social implications of fraud after a borrower becomes 30 to 60 days delinquent.
Borrowers may file criminal charges against the fraudster, but as far as the lender-servicer is concerned, he says, “they are three payments behind and need to find more money to catch up.”
Plus there is no law to protect homeowners when they deed away the property. Lenders have their hands tied since they can use their discretion as leeway only if the borrower gets the property back, Payne argues. Quite often, however, fraudsters immediately sell the property and “borrowers cannot be saved.”
In Texas and a few other states that risk may be prevented by title insurance. In states that do not require title insurance homeowners can get what is called a lawyer’s opinion of title, meaning an attorney will thoroughly review all loan records before closing. If the loan title on a foreclosed property is not under the name of the seller, which is supposed to be the case when the borrower no longer owns the property, he explains, there should be a lien that has been paid and then released.
Needless to say there will always be someone who will figure out a way to get around the law. Those who commit fraud know what they are doing, says Payne. This type of fraud happens both in states that have that law and those that do not.
He agrees, however, that it would make sense to have a prevention mechanism incorporated in the mortgage loan process that would help avoid at least this type of fraud.
Such a trigger is not there even though the problem seems to be easy to solve. Payne says his firm and peers in the industry would support a law or regulation that can eliminate a loophole that makes fraud easier.
The “be aware of fraudsters” warning is equally challenging for servicers and customers. Loan modification fraud is emerging as the most common type of fraud.
What makes things worse is that eventually the new owner of a foreclosure sale and the mortgagor also become fraud victims. Lender-servicers may have to deal with a property that is headed to a court of law for a final judgment. And that is another reason in Payne’s view servicers should be sympathetic to the plight of their borrower because the judge most probably will sympathize with the homeowner and ask servicers to shoulder the loss.
The National Loan Modification Scam database holds over 5,000 homeowner complaints, which is comparatively small when compared to millions of delinquent loans. But now more people need of a mod. Plus, borrowers still have difficulty to contact servicers since it is hard to get through to mortgage companies. So when someone approaches them saying I can do this for you, Payne argues, “the borrower easily gives $2,000 to what seems like the answer to their problems.”
He sees the solution as a clear-cut process. Servicers can initiate contact to ask whether the borrower is interested in receiving a loan mod, send the appropriate information and start the workout process. If servicers communicate immediately with borrowers in default to explain available options, they may not succumb to a fraudulent modification service. A more proactive servicer approach that includes borrower education would benefit all.
And while it may not be part of a servicer’s traditional job description the current marketplace has turned borrower education into their responsibility maybe “in as far as it affects their own bottom line,” Payne says.