Most homeowners who bought or refinanced after 2001 during the superheated years of the Millennium Boom are in precarious financial straits – their homes being underwater with negative equities and their family balance sheets are in the red, insolvent.  Since then the economy has crashed and home values have plummeted; the low tier is probably near bottom and the high tier has begun its descent at a rapid pace.

To add insult to injury, many negative-equity owners are now falling victim to the operations of unscrupulous loan modification services who demand and collect advance fees then perform little to no services. The scam typically goes like this:  a loan modification company charges an underwater homeowner an upfront fee to negotiate a modification of their existing loan with their lender. After the homeowner advances the funds, the individual receiving the funds does nothing beyond laugh all the way to the bank, having effectively stolen the fee from the homeowner.

To protect consumers, the California Department of Real Estate (DRE) recommends the following:

• when a lender records a notice of default (NOD), no loan modification service may collect any advance fees from the homeowner, even if they have a real estate license or are an attorney;
• when an NOD has not been recorded, a modification service may charge an advance fee if the homeowner enters into an agreement explaining the services and costs. However, the DRE must approve the agreement being used. Advance fees must be placed in a trust account and can only be disbursed when the services have been rendered.

In light of such schemes, the federal Department of Housing and Urban Development (HUD) is funding $79 million in grants to HUD-approved housing counseling agencies and to state housing finance agencies around the country, an increase of $21 million from last year. $55 million will be allocated to comprehensive counseling, $14.5 million for supplemental funding for assistance with mortgage scams and mortgage modifications and $9.5 million for reverse mortgages.

These agencies provide homeowners with free counseling services covering how to:

• avoid foreclosure;
• avoid mortgage scams;
• purchase or rent a home;
• improve credit scores; and
• qualify for a reverse mortgage.

first tuesday take: These types of scams had been a continuous problem in California until the legislature passed and the governor signed Senate Bill 94 in October 2009. The new law ended advance fees for loan modification services and requires consumers to be notified of the free services offered from nonprofit government-approved agencies. [For more information on other loan modification scams and the new legislation, see the March 2010 first tuesday article, Loan modification scams continue under a new name: loan audits and the October 2009 first tuesday article, California takes steps to protect current and future homeowners.]

California agents can help get this information out to distressed homeowners through FARM letters and other interaction with the neighborhoods they know or are involved in. These HUD-financed non-profit agencies perform modification services at no charge, in advance or otherwise. The Federal Housing Administration and the Hope Alliance can answer questions and help homeowners with loan modification services for no charge.  [For more information on real estate scams, see the June 2010 first tuesday article, Foreclosure prevention specialists: experts at preying on wounded homeowners.]

Re: “HUD offers $79 million in grants for housing counseling” from hud.gov and “Ripped-off caller: tell the people about loan modification scams” from the Sacramento Bee.

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Tagged as: advance fees, Department of Housing and Urban Development (HUD), Department of Real Estate (DRE), foreclosure, loan modification counseling, loan modification scams, notice of default (NOD)