If Losing Your Home Weren’t Bad Enough
Written by: Robert G. Richardson
Jackson Walker LLP; Dallas
Fraud relating to the residential real estate meltdown is pervasive. Fraud clearly existed at the beginning of the home buying process through the conduct of some representatives of the mortgage community, but waiting to take advantage of the distressed homeowners who were defrauded getting into the home loans is often another set of schemers. The impact of fraud associated with the current real estate crisis is beginning to be felt in the context of bankruptcy cases and it will only increase over the foreseeable future. Many borrowers will be forced to file bankruptcy not only because of lost jobs and inflation but because they have been defrauded when they desperately tried to salvage their interests in their homes. “Stop foreclosure” fraud is sucking cash out of the limited pool of assets that would otherwise be available to pay creditors. The extent to which bankruptcy trustees will become involved in asserting claims against the persons who have taken advantage of homeowners is unclear especially considering that residences generally constitute exempt property under Section 522 of the Bankruptcy Code, but there can be no doubt that fraud will play a prominent role in forcing some homeowners into bankruptcy. While creative schemers will continue to develop new methods to attempt to defraud desperate homeowners, this article will discuss some of their current scams.
Signing Your Deed Away
One of the most frequently used fraud schemes is based upon the schemer’s relieving the homeowner of title to the residence. Although there are various iterations of this scheme, at its core it is based on convincing the homeowner that transferring the title to the residence will lead to a solution that will avoid foreclosure and allows the homeowner to remain in the home and ultimately regain ownership. These expectations of the homeowners are frequently unrealized. While on its face appearing to be counter-intuitive (you lose title to keep title), the schemer takes advantage of the desperate homeowner by persuading them that relief from the demands of the mortgage holder can be gained by such divestiture. In its crudest form, the schemer convinces the homeowner to convey the property, sometimes with the homeowner paying the schemer a fee for his “help,” with the promise that the schemer, as the new owner of the property, will keep the mortgage current, negotiate a restructuring of the mortgage payments and then when all the problems are solved, re-convey the property to the homeowner. The schemer persuades desperate and likely unsophisticated homeowner that it is safe to trust this “foreclosure expert.” Sometimes the proposal is made only verbally or, if in writing, it is often too complex for the homeowner (assuming the transactions is truthfully described) to understand.
During the “negotiating period” the homeowner merely needs to pay rent (sometimes above market) to the schemer. Of course, the schemer takes the initial fee and as many rent payments as possible, never negotiates with the lender and then vanishes. The lender foreclosures and the borrower no longer has a house in which to live. Even if the lender has sympathy for the defrauded homeowner, there is the complication of avoiding the transfer of the title to the entity established by the schemer. The expense to the former homeowner is probably beyond their ability to pay. A further complication would exist if the schemer were able to retransfer the home to an innocent third party who paid fair value. At least in that case, the lender to the initial homeowner would likely be paid in full to release the mortgage. The schemer, however, would have picked up any equity that existed. The initial homeowner would not have a house and would have lost any equity but at least might not owe the lender.
In other related schemes, the defrauding party might entice the homeowner to transfer title by paying a nominal amount to the homeowner for the “equity” and promise to use the rents paid by the former homeowner (usually in an amount that allows the schemer to quickly recoup his equity payment) to maintain the mortgage while negotiating a new loan or a workout with the current lender. The homeowner might be required to pay a fee for the “services” associated with the promise to obtain refinancing or for the negotiations with the current lender. Frequently, the schemer represents that a willing refinance company is “ready, willing and able” to make a loan to take out the current lender. Once the schemer has taken as much in rents and fees as he feels he can get away with, he is gone.
Pre-foreclosure Sales
Because foreclosure sales are noticed to the public, the schemers have easy access to information about potential victims. Once they have identified the distressed homeowner, a schemer might propose to use the bankruptcy system to delay foreclosure despite the lack of effect such a filing might have. The pitch is that for a fee the schemer will create an entity into which the property can be transferred and the entity would then file a bankruptcy case invoking the automatic stay. The loan could be renegotiated in the context of the bankruptcy case and then the property retransferred to the original homeowner. The schemer takes advantage of the homeowner’s lack of knowledge about the bankruptcy process. The result is frequently that the schemer will merely take the fees and do nothing with respect to creating the new company or negotiating with the mortgagee. Sometimes the new entity will be the repository of a number of homes “acquired” from distressed homeowners. Often no bankruptcy will be filed because of the consequences of additional criminal liability for bankruptcy fraud. Another twist on the bankruptcy/stop foreclosure theme is that an attorney will attempt to generate new bankruptcy business by touting a “free consultation” about foreclosure avoidance strategies only to then recommend filing of a bankruptcy case—for a fee, of course—as a solution.
Avoiding Damage to Credit Rating
Playing on the fear that foreclosure would damage a credit rating and possibly impact the homeowner’s ability for future borrowing, some schemers have convinced homeowners to convey homes that are on the verge of foreclosure to the schemer so that the foreclosure would be “recorded against” that entity and not against the former homeowners. Such a “service” comes at a price not only in the form of a fee to the schemer but the possible pursuit by the mortgagee of the former homeowner for any deficiency (the difference between the foreclosure sale price and the mortgage debt). After this “strategy” has run its course, the homeowner has paid a fee and gotten nothing but a possible deficiency judgment and eviction from the home.
I Have a Deal for You!
It is particularly tempting in the current market with the significant slow down in home sales and dropping sale prices to be enticed to pay a fee to a party who represents that he has access to home purchasers with significant financial resources who can effect a “quick purchase.” The scheme could take at least two forms. The simple scam is to get the homeowner to pay an up-front fee to the “super agent” to arrange the quick sale. The schemer takes the fee and is never heard from again. A more complicated variation of the quick sale scheme is when the home has equity a purchaser actually buys the house (usually after the “agent,” who works with the purchaser, gets a fee) but only pays enough to satisfy the mortgage. This transaction is often coupled with an agreement to rent the property to the distressed homeowner at above-market rental rates with a potential option to repurchase when “things get better.” Often the lease is month-to-month and the repurchase option is not in writing. The former homeowner is never given the chance to repurchase or, if the opportunity is given, the purchase price is the true market value so the former homeowner is buying his home back having to pay for the equity he had built up in the home. As a practical matter, the former homeowner cannot afford to buy back his home.
To Reduce the Chances of Fraud
Desperate people do desperate things. Unscrupulous people just wait for “opportunities” like currently exist in the housing market. Consumer groups are challenged in this environment to educate homeowners about their legitimate options. Freddie Mac has information about foreclosure rescue schemes on its Web site. Contacting a reputable consumer bankruptcy attorney is likely money well-spent when compared with the loss of a home and wasted fees paid to a “foreclosure expert.” Vigilance is always prudent, but for the distressed homeowner it must be exercised to avoid the many fraudulent “workout” schemers who are actively marketing their “services” promising to work their magic. What homeowners will find out when dealing with such “foreclosure experts” is that their money—and possibly their homes—will be what disappears.