With millions of Americans underwater on their mortgages and facing foreclosure, loan modifications have emerged as a potential solution to the housing crisis. But the push to modify loans has also provide new opportunities for con artists, according to fair housing advocates.
"All those people who did unconscionable things to people with the subprime and predatory lending…they're making their living now in these mortgage modification scams," says Shanna Smith, CEO of the National Fair Housing Alliance (NFHA), a consortium of more than 220 private, non‐profit fair housing organizations.
A recent investigation by the NFHA and three sister organizations found the loan modification industry as being "rife with corrupt practices."
Among the findings:
- 55% required an upfront fee to start work.
- 43% guaranteed or promised they could secure a loan modification before reviewing documents.
- 24% advised or encouraged homeowners to stop making their mortgage payments or to stop contacting their lenders.
- 12% discouraged homeowners from seeking free help from government-approved housing counseling agencies.
In the accompanying video, Smith describes the findings of the investigation and offers advice for homeowners on how to avoid being scammed.
First and foremost, "anybody who asks for upfront fees is probably a scammer," she says.
Second, Smith advocates homeowners work with their current lender and take advantage of counseling services offered by the Department of Housing and Urban Development (HUD). "It may take longer but it's free and they're not going to scam you," she says.
Third, Smith says it's a "myth" that you have to be behind on your mortgage in order to qualify for a loan modification. "Don't ever stop paying because someone advises you," she says. "Don't lie about your income. Be honest and forthright…with your lender."
Fourth, don't sign over your deed to a third party who promises to pay your mortgage while working out a modification with your lender. This relatively new industry practice typically results in homeowners having their home sold out from under them, Smith says.
Fifth, only use HUD-approved loan modification companies.
Whether it's a promise to refi at a very low rate or quickly get you a loan modification, "if it sounds too good to be true, it probably is," Smith says.
While this may all seem self-evident, millions of Americans got in way over their heads during the housing boom earlier this decade and were taken advantage of by scam artists. Many financial criminals are now returning to the scene of the crime.
Smith's organization has been sharing the results of its study with lawmakers and the new Consumer Financial Protection Agency. NFHA's hope is that state and federal law enforcement agencies will investigate the loan modification industry, where it's common practice for firms to frequently change their name, phone numbers and addresses in order to stay one step ahead of the law — and the consumers they've recently bilked.
"It's like whack-a-mole," Smith says. "People in America, you're at risk of being scammed."