Unintended consequences

Our view: Federal help to modify bad mortgages spawns the latest scams

April 13, 2009

When the Obama administration unveiled plans to spend $75 billion to help homeowners modify costly mortgages, many Americans struggling to pay their loans felt relief was on its way. But to financial regulators in Maryland, the president's announcement in February invited help of a different kind - solicitations to negotiate new loan terms for a fee. And that spelled trouble. Officials at the Maryland Department of Licensing and Regulation had reason to worry; they'd been working on a slew of cases in which homeowners had paid hefty fees to loan counselors and received nothing in return. It's a burgeoning business ripe for abuse, the latest foreclosure rescue scheme to victimize Marylanders and others across the country.

Officials from the Division of Financial Regulation shared their concerns with authorities in Washington, and last week federal officials responded with promises to go after predators and with warnings to consumers. Maryland's experience reveals the extent of the problems and the vulnerability of homeowners who are trying to save their piece of the American dream. It also underscores the need for vigilance, strict laws and robust enforcement as government mortgage relief programs get under way.

Maryland has been in the forefront of this work because of its past experience with predatory lenders and more recent efforts to shut down companies that offer to help homeowners escape foreclosure but strip the equity out of a house and disappear. In the latest investigations of foreclosure rescue scams, state regulators have been helped by a little-known provision in state law that bans upfront fees for foreclosure consultants. About 70 investigations are pending, involving companies from as far away as California and Florida, and state regulators have won $80,000 in fines and refunds so far.

The problem isn't Maryland's alone. But laws and regulations on this issue vary from state to state, and companies shut down here can spring up elsewhere. Consumers need to be careful about whom they turn to for help. Solicitations are everywhere, from Craigslist to signs posted in neighborhoods.

Homeowners should avoid any outfit that requires an upfront fee and be wary of loan modification counselors who tell them to stop making their mortgage payments. Unfortunately, that advice stems from a common practice of the present system: lenders often refuse to help modify a loan until it is in default. That leaves homeowners frustrated at their inability to avoid foreclosure. Homeowners should seek the advice of state-sponsored counseling offices.

As Sarah Bloom Raskin, Maryland's commissioner of financial regulation, put it: "Loan modification operations with stiff upfront fees have replaced foreclosure rescue schemes as the scam of choice in the mortgage industry, and we fear that, despite the good intentions of the President's Housing Plan, dollars without controls will further fuel the fire."

There are legitimate programs out there to help homeowners, but the reality is that only three out of 10 who are delinquent on their loans get help. That's a statistic no one should be proud of.

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