Housing scams rise in lock-step with foreclosures

It's sad, but the number of foreclosure scams is rising as desperate owners try to hang on to their homes.

Q. We are facing foreclosure, and have been notified by the lender that a foreclosure sale will be held about three months from now. Since we received the bank's notification, we have been flooded with letters and fliers from companies and individual investors who say they can save us from being foreclosed upon, either by negotiating directly with the lender on our behalf or by purchasing our home themselves. Are these offers legitimate?

A. Some are, but many others are not. It's sad, but the foreclosure crisis has created a whole new group of con artists who are preying on financially troubled homeowners desperate to keep their homes. The problem has become so severe that I'm devoting this entire column to helping readers spot potential scams.

According to the Federal Trade Commission, these so-called foreclosure rescue firms often lure distressed homeowners into their trap by using straightforward messages such as, "We guarantee to stop your foreclosure" or simply "Stop foreclosure now!" Once they have your attention, they can employ a variety of tactics to rob you of what little money or equity you may have left - oftentimes leaving you even worse off than before, because the lender may still be able to sue you for its losses even after the property is sold.

Q. How do these companies even know that I'm in foreclosure? How did they get my name and address?

A. It's easy to get such information, because lenders must usually file a notice of default or similar document with the local government before they legally can begin foreclosure proceedings. The default notice must include the name of the borrower, the address of the property and sometimes the amount of the loan or other detailed information.

Such filings automatically become a matter of public record, available for everyone (including scamsters) to see.

Q. A number of the companies that have written or called me say they can either stop my foreclosure or renegotiate terms of my loan if I pay an upfront fee for their services. Most of them want $1,000 to $3,000. Will this work?

A. Maybe so, but probably not. Paying an upfront fee for uncertain results is usually a bad idea and can be a red flag that you're about to be conned. In many scams, the scammers take the upfront fee, cash the check and then do little or nothing to resolve the owner's problem.

Be especially wary if the rescue company tells you not to contact your lender or a real estate lawyer because its on-staff "negotiator" will handle all the work. By keeping you silent, an illegitimate firm can buy more time to take even more of your money.

Q. One firm is offering me a "rescue loan" that it says will bring my mortgage current. Should I accept the offer?

A. No, not unless you have an experienced real estate attorney review the contract and related paperwork first. Many rescue-loan contracts are difficult to understand. Scam operators often use complex legal terms in their contracts to make you think that you're getting a new mortgage to bail you out of the mess, but signing the deal actually transfers title (and ownership) of the home from you to the scamster.

Q. One company that contacted me offered to purchase my house and then rent it back to me for roughly half of what I have been paying toward the monthly mortgage. I would also have the option of buying it back when prices start going up again and my finances improve. It seems like a good deal. What do you think?

A. Be careful, for so-called rent-to-buy schemes are proliferating.

In a typical scam, you are told to surrender the title of your home as part of a deal that will allow you to remain in the property as a renter. You also might be told that giving the company title will allow it to find a buyer with a stronger credit rating who can get new financing and stop the foreclosure.

The catch? "The terms of these deals are usually so burdensome that buying back your home becomes impossible," a representative for the Federal Trade Commission says. "You lose your home, and the fraudster walks off with all or most of your home's equity. Worse yet, when the new borrower defaults on the loan, you're evicted."

Q. How can I avoid getting ripped off?

A. First, talk directly to your current mortgage lender as quickly as possible. Banks don't like to foreclose, and recent government actions have encouraged them to work even harder to help keep people in their homes.

One of the better books I've seen on fighting foreclosure is "Foreclosure Self-Defense for Dummies," part of the best-selling "Dummies" line of books. It retails for $19.95 and is available at most bookstores and at dummies.com.

Also get a copy of the FTC's free booklet "Mortgage Payments Sending You Reeling? Here's What to Do." You can download a copy from the agency's Web site (ftc.gov) or mail your request to the Federal Trade Commission, Consumer Response Center, 600 Pennsylvania Ave. NW, Washington, D.C. 20580.

• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City CA 90231-2960

© 2008, Cowles Syndicate Inc.