When times are tough, scam artists know just how to exploit a desperate situation. That's especially true when it comes to the housing industry, which has been decimated by a record number of foreclosures and defaults in the past year.
One of the rip-offs that has emerged in this mess: fraudulent loan modification companies. Preying on troubled homeowners' fears, these companies promise to negotiate lower interest rates and/or principals on loans so consumers can afford their monthly payments and stay in their homes.
Unlike legitimate loan modification services, rip-offs require a homeowner to pay an upfront fee -- usually in the range of $500 to $1,500. Once the homeowner pays up, the scammer takes the money and runs.
Though there are no official estimates on how many phony loan modification companies are out there, housing advocates say they are on the rise.
"There's been a proliferation of mortgage scams. . . . It's really hard to qualify, but we hear of something new once every two weeks," says John Snyder, the manager of foreclosure programs for NeighborWorks America, a community development and housing nonprofit organization.
- Play the video to the right for more on mortgage scams.
The mortgage modification industry cropped up about a year ago as credit dried up and troubled homeowners with adjustable-rate mortgages were left with few options to avoid foreclosure, Snyder says. Contacting strapped consumers by e-mail, regular mail or fliers placed under front doors, these companies say they offer homeowners one last shot at keeping their homes.
The problem is that these con artists never actually negotiate with the lenders. Making matters worse, some homeowners stop making mortgage payments, thinking that everything is being taken care of. Eventually, those homeowners realize they've been had, but in some cases it's too late to save their houses.
There are legitimate companies out there, but homeowners need to check their credentials first. Over the past six months, many former real-estate professionals have rushed into this new field without adequately familiarizing themselves with modification procedures and lender guidelines, Snyder says.
As soon as the $700 billion government bailout was announced late last year, Greg Rand, the managing partner with Prudential Rand Realty, says he received a handful of e-mails from loan modification companies offering to train and certify him as a loan modification counselor. Some of the companies then offered to sell him names of homeowners (aka potential customers) who were facing foreclosure. "It strikes me that quality control was not top of mind," Rand says.
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The potential fallout of using an inexperienced modification company can be devastating to a struggling homeowner. Many banks will allow a consumer only one shot at reworking a loan, says Justin Pane, the vice president of the Amerimod Modification Agency, one of the largest modification companies in the country. If a third party helps negotiate terms that still aren't affordable for the homeowner, he could eventually lose his house.