Beware: Foreclosure scams on the rise

Amid the continuing housing meltdown, officials are seeing an 'extraordinary' surge in foreclosure 'rescue' rip-offs. As in all financial transactions, here's the bottom line: If a deal seems too good to be true, it probably is.

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By Carolyn Salazar, MSN Money

When Aleem Morris lost his job as a forklift operator several years ago, his life began to fall apart.

He fell behind on loan payments. His car was repossessed. And then, after his debt ballooned to $118,000, the Newark, N.J., house that had been in his family for 24 years went into foreclosure.

Just as things seemed most desperate, a flier arrived in the mail offering help. "Are you behind in your mortgage payments, and facing foreclosure of your property?" it asked.

It gave Morris hope, promising to shore up his credit and save his home. But months later, his two-story, vinyl-sided home had been stripped of about $127,000 in equity, he was still in debt, and the house was back in foreclosure.

"I had been conned," he said. 'Another nightmare all over again'

Morris, 32, is one of thousands of people across the country who have been duped by a fast-growing scam that targets some of the most vulnerable and desperate: people in danger of losing their homes.

These foreclosure "rescue" scams aren't new, but they are exploding across the country as criminals try to capitalize on the surging number of victims of the foreclosure crisis.

These criminals promise hope when there might be none. They take money upfront and say they will help modify the victim's mortgage; instead, they steal the money -- and sometimes the victim’s property.

Why now? To paraphrase one of America's most famous bank robbers: Foreclosures are where the suckers are. Last year saw an 81% increase in foreclosure filings from 2007 -- about 3.2 million in total -- and a 225% spike over 2006, according to RealtyTrac, an online marketplace for home foreclosures. Map: Foreclosures across the country

When relief will come is uncertain. A $300 billion foreclosure rescue bill was signed into law last year, though critics say it was too weak to stem the tide of foreclosures. President Barack Obama has introduced a $275 billion plan to halt soaring foreclosures, but only time will tell how successful the plan will be.

Meanwhile, the criminals continue to grow in number and brazenness.

"We think that the crest of the foreclosure rescue fraud is in front of us," said Brad Elbein, the director for the Federal Trade Commission's Southeast region. "We don't know where it's going to be, but we definitely think there is going to be more."

The FTC has filed lawsuits against six foreclosure rescue companies and has forced six others to cease operations. The agency expects to file additional lawsuits this year, Elbein said. Several attorneys

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general, including those in Florida and New Jersey, have also gone after these companies to try to shut them down and recover the losses.

Last year, New Jersey Attorney General Anne Milgram charged 73 people -- including mortgage brokers, lawyers and title appraisers -- with committing foreclosure rescue scams. The defendants face civil racketeering charges, and their assets have been seized. Prosecuting the greedy

Since then, Milgram's office has received a slew of new complaints, and it plans to file additional charges.

"We've never seen anything like this before," Milgram said. "We are getting an extraordinary amount of complaints every day and have a number of cases going. Our goal is to help people keep their homes as much as possible, to stop the bad actors, to recover any money that we can that homeowners have lost and to really help people work through and find the right solutions."

How the scams work

There are three types of foreclosure rescue scams, most of which involve fly-by-night outfits that advertise by posting fliers on utility poles, at bus stops or through Internet ads. "Stop Foreclosure Now!" fliers might say. Or: "Keep Your Home. We know your home is scheduled to be sold. No problem!"

Often, they get their word out by sending letters -- or even by showing up at people's doorsteps.

In one scheme, the bait-and-switch, a person is asked to sign documents for a new loan but is in fact tricked into signing away the title of the home.

The second is the rent-to-buy scam -- the one Aleem Morris fell prey to -- in which the victim agrees to surrender the title of his home while the scammer tries to fix his credit. Although the victim is told he will be allowed to buy back his home, the terms are usually so onerous that the person winds up losing the house -- but not responsibility for the unpaid mortgage.

But experts say those two scams have fallen out of favor recently and that a third type -- phony counseling, or phantom help -- has been gaining the most traction within the past year. In this scam, a consultant will promise to negotiate a deal with the lender and save the house, but only if the homeowner pays an upfront fee of $1,000 to $5,000. Sometimes the victim is also told to make mortgage payments to the consultant rather than the lender, but after a few months, the consultant just disappears.

"People are desperate; they are vulnerable," said Ira Rheingold, the executive director of the National Association of Consumer Advocates. People will listen to "anybody who comes along and says, 'I can save your home,' even though they in their hearts know it is not going to work."

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'People are desperate'

Twenty states have passed rescue-scam laws over the past five years to help homeowners who have lost their properties or otherwise been scammed by foreclosure consultants. But the laws differ from state to state, and, unlike mortgage brokers and real-estate agents, foreclosure consultants face no licensing requirements or mandatory tests.

The reason these scams have become so successful, Rheingold said, is because people who are losing their homes have so few other alternatives.

"They are sort of filling a vacuum," Rheingold said. "People are desperate, and when they turn to legitimate means -- like contacting their lenders or contacting nonprofit housing counselors to get help to stop a foreclosure -- more often than not they walk away frustrated and with no help."

Where to get help

Homeowners facing foreclosure can get some help, but they have to ask for it. They could try to negotiate with their lender directly or approach HUD-certified loan counseling agencies -- nonprofit groups that do not charge fees.

Legal-aid societies across the country have also taken on these types of cases.

The important thing, experts say, is to start the process early, rather than wait until it's too late. "One of the problems we see is that people who are having financial problems sink into denial and refuse to answer their phone, refuse to open their mail and refuse to talk to their lender," the FTC's Elbein said. "That's a huge problem."

For Morris, help was a phone call away. After he reached out to Essex-Newark Legal Services to intervene, one of that agency's lawyers helped him stop the foreclosure and -- by working with an grandfather who lives with Morris -- renegotiate financing for the home.

Morris also hired an attorney to sue the scammers and has reached a partial settlement with his original mortgage company. Although the other cases are still pending, Morris and his grandfather are now able to stay in the home.

"This story has a happy ending, and I'm glad about that," Morris said. "But it has drained me mentally."

For additional help or to report a scam, call the Department of Housing and Urban Development at 1-800-569-4287 or the FTC at 1-877-FTC-HELP.

Produced by Anh Ly / Graphics by Joe Farro and Anh Ly

March 6, 2009