Millions of American homeowners are still underwater, attempting either a refinance or a loan modification to help make their mortgages more affordable and their homes more valuable.
But far too many homeowners don't properly investigate the supposed source for their mortgage relief and wind up scammed by fake mortgage-relief companies.
Mortgage-relief scams became a burgeoning trend in the aftermath of the Great Recession as massive home price declines wiped out home equity leaving millions of homeowners underwater -- owing more on their mortgages than their properties are worth.
With so many homeowners facing financial distress, mortgage-relief scammers have stepped up their efforts to try and separate vulnerable homeowners from their money.
According to the U.S. Federal Trade Commission, "Mortgage relief scammers falsely claim that, for a fee (typically hundreds or thousands of dollars paid up-front), they will negotiate with consumers' mortgage lenders or servicers to obtain a loan modification or other relief to avoid delinquency or foreclosure. Many of them pretend to be affiliated with the government or government housing assistance programs. Some falsely claim to be offering legal services or 'audits' of consumers' loan paperwork to help them negotiate a resolution with their lenders. Unfortunately, these operations often fail to obtain the relief they promise, and they sometimes fail to take even minimal steps to help consumers."
Jeremy Heck, a consumer law attorney in Columbus, Ohio says there are two major types of mortgage-relief scammers that advertise heavily via the Internet and mail.
"There are mortgage brokers that attempt to refinance a consumer's residential real estate for what amounts to extraordinarily high fees," he explains. "There are other companies that advertise to modify a consumer's mortgage and claim they can achieve a much lower interest rate. Both of these types of companies advertise in a way that implies they are related to or are part of a governmental organization."
Here are four tips to help prevent mortgage-relief scams:
Do not pay any money up front
Heck notes that some loan-modification companies charge high fees of between $2,500 and $5,000. "But at the end of the day, they provide absolutely no benefit," he says. If you are talking to a mortgage-relief company that promises they can reduce your home loan, ask for testimonials and references from satisfied clients -- and never put any money down until you see some results.
Don't assume you are safe from foreclosure
If you've been receiving mortgage delinquency notices from your mortgage lender, you may be closer to foreclosure than you might think. At that point, it's much better to work directly with your bank or lender than a mortgage-relief company. "Many times a consumer will believe they are protected from foreclosure having retained a loan modification company, but in reality, there is no protection and a foreclosure is usually imminent," says Heck.
Ask a lot of questions
If you do decide to hire a mortgage-relief company, start asking questions, and don't agree to anything until you get those questions answered.
"When trying to identify a scam, mortgage or otherwise, I always recommend sticking to the basics," advises David Reiss, professor of law at the Brooklyn Law School. "Does the person have a call back number? Does the organization have a website? Will they put their promises in writing soon after meeting you? Will they show you the documents that they want you to sign soon after you agree to their terms? Very often these basic questions will review a scam for what it is."
Watch for common "red flags"
Becky Walzak, senior partner of Looking Glass Group, a mortgage services firm in Deerfield Beach, Fla., says diligence is the key. She says to stay away from mortgage-relief companies that want all of your individual information such as social security number, credit card information, etc., over the phone, and who offer no written documentation of their strategies and track record.
"If they do offer references, call and ask specific questions such as when they helped, how they helped, how did you find out about them," she says.
Being ripped off by a mortgage-relief scam when you're fighting to save your home is a financial disaster that may take years to undo. Proceed cautiously with mortgage-relief companies, and don't hire anyone without the proper due diligence. You may wish to hire a real estate attorney to help you review documents and contracts for you.
Brian O’Connell is a freelance writer from Doylestown, Pa., with 15 years experience covering business news and trends, particularly in the financial, health care and career management sectors. His byline has appeared in dozens of top-tier national business publications, including The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, CBS Marketwatch, and many more. The author of 14 books, O’Connell has appeared as an expert commentator on business issues for CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio, The LA Times, and others.