Regulators struggle to contain foreclosure fraud

John W. Schoen Senior producer • Profile • E-mail

The government is struggling to hold back a wave of foreclosure "rescue” scams arising from the growing number of homeowners facing the loss of their homes. It may be fighting a losing battle.

On Monday, Treasury Secretary Timothy Geithner declared war on the con artists who prey on borrowers desperate to find a way to keep their homes.

"American homeowners have been through enough in the past few years," Geithner said, adding that the last thing they need is to get scammed as they struggle to keep their homes.

"These predatory scams callously rob Americans of their savings and potentially their homes," he said. "We will shut down fraudulent companies more quickly than before. We will target companies that otherwise would have gone unnoticed under the radar."

But as the problem spreads, regulators and prosecutors seeking to crack down on these scams seem to be fighting a forest fire with a garden hose.

Some 3 million households have already lost their homes to foreclosure. As of Jan. 30, 2.9 million people were 60 days or more past due on their mortgages, one out of 10 were delinquent, according to the government’s Hope Now Alliance. Another 6 million households are expected to face foreclosure in the next several years, according to private estimates.

The Federal Trade Commission has sent warning letters to 71 companies it says were running suspicious advertisements and has filed five new civil cases to halt illegal loan modification scams. Attorney General Eric Holder says the FBI is investigating about 2,100 mortgage fraud cases.

"If you discriminate against borrowers or prey on vulnerable homeowners with fraudulent mortgage schemes, we will find you, and we will punish you," Holder said.

Over the past year homeowners have been flooding state attorneys general with complaints about for-profit loan modification consultants. While some of these outfits are legitimate, authorities say many are con artists.

Potential victims are easily identified: various filings, including "pre-foreclosure" notices, are public records, providing all the details a would-be scammer needs to target fraud victims. Many snare victims via Web sites promising quick fixes over the phone.

The scams take several forms but usually involves payment of an upfront fee in exchange for a promise to resolve a pending foreclosure. Some of these foreclosure "counselors" simply pocket the fee, usually a month’s mortgage payment, with little or no further contact with the distressed homeowner. Others compound the fraud by convincing the homeowner to sign over the deed or present forged documents purporting to show the foreclosure has been set aside.

Some scammers will file a bankruptcy in the homeowner's name without consent or knowledge. While bankruptcy usually stops a foreclosure temporarily, this form of the scam adds insult to injury by leaving the homeowner with additional legal costs and the burden of a credit record that will make it difficult to buy or rent a new home for up to 10 years.

Monday’s joint announcement by the Treasury, The Department of Justice, the Department of Housing and Urban Development, the Federal Trade Commission and the Illinois Attorney General provided homeowners with a high-profile warning to avoid foreclosure rescue scams and a pledge to better coordinate government efforts to stop them.

The government’s Financial Crimes Enforcement Network reported in February that banks and other lenders filed some 62,000 so-called Suspicious Activity Reports relating to a wide variety of mortgage frauds during the 12 months ended in July, 2008. That's a 44 percent increase over the preceding year.

Despite the widespread publicity and broad economic damage inflicted by mortgage fraud over the past several years, efforts to thwart scams have fallen far short. Part of the problem lies in the fractured regulatory structure tasked with combating mortgage fraud. Of those 62,000 reports of possible mortgage fraud, the Office of Thrift Supervision handled 47 percent, The Office of the Comptroller of the Currency handled 36 percent and the rest went to the Federal Reserve, the Federal Deposit Insurance Corp. and the National Credit Union.

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