Housing Plan Creates Opening for Scammers

Borrowers Who Hire Firms to Renegotiate Mortgages Rarely Come Out Ahead
By: JAMES R. HAGERTY: WSJ.com
Obama's housing plan will give troubled borrowers a chance to lower their mortgage payments - but could also give firms an opportunity to fleece unsuspecting borrowers.

President Barack Obama's foreclosure-prevention plan, announced last week, is designed to give several million troubled borrowers another chance to lower their mortgage payments. But government officials and counseling agencies warn that it also presents a golden opportunity for firms to fleece unsuspecting borrowers.

Over the past few years, there has been a proliferation of firms that charge fees for what they promise will be quick results in negotiating with banks to get easier loan terms. In many cases, the firms take the homeowner's money but never deliver the services promised. Even when the firms do deliver what they promise, they charge fees - often more than $1,000 - for services borrowers can receive free. In July, Congress increased to $360 million the funds it has allocated for foreclosure-prevention counseling to organizations that provide the service without charging consumers.

"Borrowers don't need to pay anybody," says William Apgar, a senior adviser to Shaun Donovan, President Obama's new secretary of housing and urban development. But Mr. Apgar and others fear that the recent headlines about the Obama housing plan will prompt more consumers to seek help in the wrong places.

Under the Obama plan, the government will offer incentives and subsidies to persuade mortgage-servicing companies to offer lower monthly payments to borrowers in danger of losing their homes to foreclosure.

The publicity about the plan could be "the greatest advertisement of all for these scamsters," says John Ryan, an executive vice president of the Conference of State Bank Supervisors, which helps coordinate bank regulators. But he adds that his group is working with state and federal regulators to alert consumers and crack down on scams.

Home Truths
The Federal Reserve recently issued advice for people seeking to modify their mortgage:

· Work only with HUD-approved nonprofit counselors. (See www.hud.gov.)

· Don't agree to pay a fee before you are provided with the promised service.

· Beware of people offering "guaranteed" results.

· Don't sign blank forms or documents you haven't read.

In the meantime, fee-charging loan-modification firms "are popping up everywhere," says John Snyder, a manager at NeighborWorks, a nonprofit group formed by Congress to support community-revitalization organizations. In California alone, the state Department of Real Estate has reviewed fee-agreement forms submitted by nearly 300 firms touting loan-modification or similar services and has posted them on its Web site. (The department says it doesn't endorse the firms or their services.) Cable-television stations also have been running ads for services that charge fees, many designed to look as if they come from government agencies or other trusted entities.

Consider the case of Marilyn Elias, a retired medical-records manager in Tempe, Ariz. Last September, when she was exploring ways to reduce her mortgage payments, Ms. Elias's son told her about a company called GSA Mortgage in Phoenix that he thought might be able to help her. She says she paid upfront fees totaling $1,455. "All they did was take my money," says Ms. Elias, a widow. "They haven't done one thing."

In addition, she says, an employee of the firm advised her to skip payments on her mortgage while waiting for a loan modification. That, she says, caused her credit score to plunge, even though she has since caught up with the payments. GSA Mortgage didn't respond to repeated requests for comment.

Wendy Brooks, a mortgage broker for Scout Mortgage in Scottsdale, Ariz., is trying to help Ms. Elias get a loan modification from the company that sends out her monthly mortgage bill, Aurora Loan Services. Ms. Brooks says she won't charge Ms. Elias anything for that help. A spokeswoman for Aurora declined to comment on Ms. Elias's loan.

Jeff Pasquale, an aircraft technician who lives in Lancaster, Calif., says he first tried to deal directly with his mortgage lender, Wells Fargo & Co., to negotiate lower payments. "I tried to handle it myself, and they started jamming me around," he says. He says he didn't seek a free HUD-approved counselor because a colleague had tried that without success.

Instead, Mr. Pasquale says he paid $1,100 about a month ago to a firm called U.S. Loan Assistance Center in Orange, Calif., which he found on the Internet. He says he believes the firm will deliver on its promises and is awaiting the results.

Eric Dena, processing manager at U.S. Loan Assistance Center, says Mr. Pasquale's payment is being held in a trust account until the firm's work is completed. He said his firm works faster than nonprofit counselors.

A spokeswoman for Wells said she couldn't discuss the specifics of Mr. Pasquale's situation, but added: "Wells Fargo encourages borrowers to work with us directly or a nonprofit housing counselor. We see no advantage to hiring third-party companies."

Borrowers are tempted by these firms partly because banks often don't have enough trained staff to cope with all of the calls they get from desperate homeowners and because nonprofit counselors don't always provide good service, says Jack Guttentag, a professor of finance emeritus at the University of Pennsylvania's Wharton School. He operates a Web site that offers free mortgage information called mtgprofessor.com.

In theory, Mr. Guttentag says, it might make sense for some people to pay a modest fee for help in negotiating with banks. But he has found no way to determine which of the fee-charging firms are legitimate. Mr. Guttentag suggests that borrowers first try calling their loan servicers for help. If that doesn't work, he says, borrowers can try to get a free, government-approved counselor. One way to find those is to call the mortgage industry's "Hope Hotline" at 888-995-4673 or click on www.hopenow.com.

Firms that charge big fees for helping with loan modifications are just the latest potential trap for people facing foreclosure. In recent years, many distressed borrowers have fallen for "foreclosure rescue" schemes in which firms or individuals promise to help them avoid foreclosure through arrangements that involve transferring the title of their home to the supposed rescuers.

Rather than solving the problem, the deals typically resulted in the rescuer stripping the remaining equity in the home. As many of today's troubled borrowers have little or no equity remaining in their homes, fee-based loan-modification schemes have eclipsed foreclosure-rescue ones, says Mark Kaufman, Maryland's deputy commissioner of financial regulation.

The Federal Reserve and the Federal Trade Commission have published warnings about what they call "foreclosure scams." State attorneys general also are issuing warnings and in some cases prosecuting firms alleged to have cheated borrowers. U.S. Sen. Herb Kohl, a Wisconsin Democrat, has introduced legislation that would bar "foreclosure consultants" from collecting fees before they complete promised services. Some states, including California, Maryland, Iowa and Florida, already have laws with restrictions on upfront fees for these services.