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Mortgage scams come in 31 flavors. Here are three top choices of con artists and how to avoid them.

More than 323,000 properties entered some state of foreclosure in the first quarter of 2006, a 72% increase over the same period a year ago, according to Realty Trac.

Scammers know that people in trouble make easy victims. They’re swooping in and offering to “help” borrowers — and ending up with their house. Victims sometimes spend years fighting to get their homes back and some never succeed.

Scam No. 1: The Bailout, AKA Equity Stripping

In theory, a person or company could help a homeowner keep his house via a process in which the homeowner sells the house very cheaply to them while the homeowner gets his finances in order. The new owner pays the mortgage, and the old homeowner pays to live in the home in the meantime, buying back the home (with interest) in a fixed amount of time. If the financial setbacks are temporary, everybody can win: The homeowner keeps the house and the company earns a profit for its role as rescuer.

But reconveyance, as it’s sometimes known, is ripe for abuse.

Suppose you’ve got a $400,000 home, with $100,000 of equity in it. A divorce and medical bills have you facing foreclosure. Suddenly, the phone rings with a bailout proposal.

So you sell your home, for $320,000 — not much more than what’s owed on the mortgage. Why sell for so little? Because it’s never intended to be a true sale; remember, you don’t think you’re selling the house permanently, but buying it back in a short period, right?

The new purchaser, meanwhile, takes out a $320,000 loan, wipes out any liens on your property and even gets you a little cash back; and you get a two-year lease with a purchase option at the end.

But soon you realize you’re in trouble. Why? Because scammers aren’t about to let you get your home back. Often, the lease terms desperate homeowners agree to turn out to be as onerous as their previous mortgage payments that helped get them into trouble. Con artists also manipulate victims when facing crucial deadlines.

Clients are often told that payments are going be to under $1,000 a month. But the criminals dragged out the process until the foreclosure was imminent and they were backed into a corner. When they got to the closing they often change the terms for rent, example would be to raise the rent to $1,450. This increase is likely to make them default on the rent.

The process to get to this point is often dragged out and leads to the home owner having very few options at this point because the bank is so close to foreclosure and taking back the home.

This likely leaves you with the only option of agreeing to the higher rent and once you default on this rent payment the new purchaser evicts you as soon as possible, sells your $400,000 house, pays off the $320,000 loan and pockets about $80,000 — all for a few months of work. Some people don’t even fight back because they don’t know they have options — such as calling a lawyer.

Don’t do any of the following:

  • Don’t fall for promises like “We’ll save your credit”; “We’ll buy your house ‘as is'”; or “We’ll get you a new mortgage with low monthly payments.”
  • Don’t sign away ownership of your property (sometimes called a “quit claim deed”) to anyone without the advice of lawyer you trust. “When people get behind on their loan payments, they get a bit desperate, but the answer is not putting someone else on your title,” says Oakland real-estate attorney James Hand.
  • Beware of any home sale contract where you aren’t formally released from liability for your mortgage. Also, make sure you know what rights you’re giving up and that you agree to giving them up.

Scam No. 2: Phantom Help 

This scheme is fairly simple: Let’s say you’re way behind on your home payments and facing foreclosure. An individual or group approaches and offers to help — then charges you thousands of dollars for various administrative duties like filing forms and phone calls, or else keeps simply promising a big rescue later. You can probably guess what’s really going on: The “helper” isn’t really doing anything at all to stop your foreclosure despite collecting thousands from you. By the time you figure out you’ve been hoodwinked, it’s often too late to stop the loss of your home.

How did the scammer know to target you, anyway? That’s easy: When a lender schedules the home for public auction, the matter becomes public record. In just more than half of the states, a lawsuit must be filed in order to spur a sale. Anyone can check the court documents to find the list of lawsuits. Soon a letter or phone call comes like something from a guardian angel — only it’s a vulture.

In the other states (including California and Massachusetts, for example), the process doesn’t go through the courts; foreclosure sales simply must be advertised publicly, as in the local newspaper. This latter process usually moves faster — and makes an already-stressed homeowner even more vulnerable to a scam.

Do’s and don’ts:

  • Do call your mortgage company or lender if you’re in trouble. Ask for the loss mitigation department. If you take a proactive aproach you will have a better chance of working something out with your current lender and avoid possibly avoid foreclosure. Lenders do not want to take back your home through foreclosure.
  • Don’t call for assistance from one of those ubiquitous signs on telephone poles that advertise help. Chances are, that’s not where help lies.
  • Do proceed with caution, if a company or person:

   – Describes itself as a “mortgage consultant,” “foreclosure service,” or something similar;
   – Collects a fee before giving any services;
   – Advertises to people whose homes are listed for foreclosure, including anyone who sends fliers or solicits door-to-door; and says you should make home mortgage payments directly to them or to their company instead of your mortgage lender.

  • Don’t panic. Get full information on the foreclosure process in your state. Make sure you know ALL deadlines — for court, for document filings, etc. States usually have associations that can offer free advice.

Scam No. 3: The bait-and-switch 

In this scam, which NCLC calls the “bait-and-switch,” con artists actually trick a homeowner into signing over the deed to a home — without his knowledge.

How could somebody fall for this?

You don’t have to be old or a non-English speaker to be stymied by the legalese. These schemers get their victims to sign incredibly complicated legal documents that resulted in their property being transferred to entities such as trusts. “Most attorneys can’t understand these trust agreements. And if a criminal can’t get the signature, forgery goes a long way in real estate these days.

Do’s and don’ts

  • Don’t sign anything that has any blank spaces. Information could be added later that you didn’t agree to. (Yes, it happens.)
  • Never sign a contract under pressure. Always know exactly what you’re signing. Take your time to review the paperwork thoroughly — ideally with a lawyer who only represents your interests.
  • Never make a verbal agreement. Get all promises in writing and get full copies.

Cast a jaundiced eye at deals that sound too good to be true. Lately, some scam artists promise they’ll wipe out or pay off your home’s debt for you (so-called “debt elimination”). Some flustered homeowners bite. Just remember the free lunch rule: There isn’t one. 

A final thought: Remember, if you can’t fix your finances, selling your house (on the normal market that is) may not be the end of the world. Sure, you’ll be a renter again. But given how much homes around the country have appreciated in the last several years, chances are you’ve made some money, which you can use to get back on your feet.

Update September 6th 2008: If you are considering a short sale please read our short sale options section to find out if you would qualify for a real estate short sale.

If you want to stay in your home and feel that you could continue making your mortgage payments if you were able to modify your loan payment please make sure you contact your current lender. They are taking a much more pro-active approach and really trying to work with homeowners to do loan modifications and avoid foreclosures.

Carlos Aguilar
Axia Real Estate Group, Inc.
1450 Frazee Rd. Suite 210
San Diego, CA 92108
(888) 317-1496

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