Scams Target Mortgage Loan Modifications

The collapse of the housing market has spawned a whole new industry — companies that say they can help troubled homeowners negotiate modifications to their mortgages. But officials in several states are warning that these offers can sometimes be more scam than substance.

When Karen Grossaint lost her job three years ago, she quickly started having trouble making the payments on her home in a suburban Denver community. It wasn't long before the deluge hit.

"Three days after my payment was late, I started getting all kinds of phone calls and getting all of these things in the mail for people wanting to reduce the mortgage, to restructure the mortgage," she says.

Grossaint had fallen into the sights of the loan modification industry — companies that work with homeowners and their lenders to negotiate better terms and reduce mortgage payments, ultimately helping them avoid foreclosure. At least, that's what they're supposed to do.

"The biggest real estate scam of the year is definitely this loan modification entity scam," says Erin Toll, the head of Colorado's Division of Real Estate. She says the housing crash is fueling this cottage industry.

"These loan mod entities are springing up out of nowhere," Toll says. "What we're seeing from our investigation is many of them are unemployed mortgage brokers, or unemployed real estate brokers. The market's not very good, so they're looking for something else to do."

Toll's office has subpoenaed more than a dozen loan modification companies to make sure they're adhering to the letter of the law. In Colorado, like many states, that law says brokers have to be licensed, and they can't collect most of their fee up front.

"Unscrupulous loan modification entities will say, 'Give us one month's mortgage payment up front, and we promise we'll cut all your future payments in half.' And instead what they do is abscond with the money," Toll says.

Eight of Colorado's subpoenas went to California, and half of those companies have not yet responded. Many no longer answer at the phone numbers listed on their Web sites.

California seems to be the epicenter for this new industry. Jeff Davi, the director of that state's Department of Real Estate, says officials started getting complaints about loan modifiers last summer, and now they have more than 200 open investigations.

"I think it's the tip of the iceberg," he says. "We are hearing about it more and more every day. We hear about other states running across it now quite a bit. And so we're just trying to make sure the public knows."

In their defense, loan modification companies say they're providing a service that's badly needed during this crisis. Their staffs have the patience to get through to the right people, and the experience to negotiate better terms with lenders and to succeed at a process that can overwhelm homeowners who are already in financial distress.

But Toll, Colorado's real estate director, points out that homeowners have another option.

"You can get these exact same services for free through HUD-approved counselors by calling the Foreclosure Prevention Hotline [Colorado; national]," she says.

Foreclosure hotlines send homeowners on to nonprofit agencies like Brothers Redevelopment Inc., in suburban Denver. The counseling director there, Shannon Peer, says his organization isn't just free, it's federally regulated.

"Our industry has been around for many, many, many years," Peer says. "This industry where somebody's charging for services is fairly new. There are few guidelines."

Homeowners hoping to renegotiate their loans, either on their own or with help, may soon find it a bit easier. The Obama administration's housing plan includes incentives to get lenders to modify more troubled loans. How well that will work in the long run is still a question, though — more than half the loans modified last year were back in trouble six months later.

Megan Verlee reports for Colorado Public Radio.

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