Steering Clear of Foreclosure Prevention Scams

Steering Clear of Foreclosure Prevention Scams

Atlanta Fed Community Affairs Officer, Juan Sanchez
Juan C. Sanchez
Vice President and
Community Affairs Officer

Mortgage-related fraud and scams are nothing new, but novel forms of these illicit activities are certainly on the rise.

As early as the 1970s, "flipping" properties had become a common problem, especially in inner city neighborhoods. Lower income communities were frequently targeted by investors or developers who purchased vacant or dilapidated homes and resold them for huge mark-ups. Flippers would typically sell the properties among themselves several times before finally passing the houses on to homebuyers at inflated market values. They would add a fresh coat of paint and do some minor cosmetic work, but seldom made substantive repairs. These properties were nevertheless often sold as rehabilitated homes for much more than they were worth.

Mortgage fraud has become more sophisticated over time and more difficult to detect. Some organizations have hired their own appraisers and title companies to elevate property values quicker and issue clean title. Fraud has also been detected in loan files, where it is not uncommon to find falsified applications, pay stubs, tax returns and bank statements that overvalued homes and saddled homebuyers with loan terms they could not afford.

The U.S. Treasury and the Financial Crimes Enforcement Network estimate the cost of mortgage fraud to the industry as high as $25 billion in 2008, when over 65,000 Suspicious Activity Reports were filed. A report by the Mortgage Asset Research Institute (MARI) indicates the majority of mortgage scams detected last year were connected to application fraud and falsification of financial statements.

In addition to these common scams, which are still prevalent, new forms of fraud are appearing. The current deterioration in the housing market and the rising number of foreclosures has spawned a wave of new activities in the guise of foreclosure prevention services.

These "rescue" scams target consumers in danger of losing their homes to foreclosure. They claim their services will help homeowners save their property, but they nearly always fail to deliver. These con-artists, who may also claim to provide foreclosure counseling, make a profit by collecting upfront fees or cashing in on mortgage payments that are never paid to the lenders. Ultimately their actions strip equity and hasten foreclosure.

Foreclosure schemes may also promise rescue loans, loan refinances or workouts. Legal forms designed to look like loan documents are presented to consumers, but those who fall into the trap find they are actually signing transfer of title documents and surrendering legal rights to their properties.

The Federal Reserve System is following emerging predatory foreclosure schemes closely and taking steps to arm consumers against them. For example, the Fed has launched advertisements in movie theaters in some of the highest foreclosure markets in the country to inform consumers about these illicit practices. We are also working closely with nonprofit organizations and legitimate counseling agencies to ensure that homeowners threatened with foreclosure receive reliable assistance from reputable organizations.