Evidence suggests that individuals who are less financially savvy are more likely to fall victim to financial scams, hold high cost mortgages, and engage in costly credit card behavior. As a result, the cost of limited financial literacy can be extremely high. Throughout Financial Literacy Month, we are highlighting key GAO reports that provide useful financial information for consumers.
Foreclosure rescue schemes
Some of the most tragic fraud stories involve homeowners who have lost their homes in foreclosure rescue schemes. Since GAO first studied this issue in 2010, foreclosure rescue schemes—which promise but do not deliver foreclosure prevention assistance—remain numerous and have become more complex in recent years. Unfortunately, these schemes distract homeowners from pursuing legitimate opportunities to save their properties.
What you don’t know can hurt you
Many homeowners are unaware that
- It is illegal in most cases to charge an up-front fee for foreclosure relief services or mortgage modifications.
- Nonprofit housing counseling agencies provide free foreclosure prevention counseling services. These agencies are funded, in part, by the Department of Housing and Urban Development (HUD) and NeighborWorks.
- You can confirm that a company is a HUD-approved housing counseling agency by going to HUD’s website.
Watch out for these types of scams
- Forensic audits. Scammer offers to review a homeowner’s mortgage loan documents to determine whether the lender complied with state and federal mortgage lending laws.
- Bankruptcy to avoid foreclosure. Scammer promises to negotiate a loan modification with the lender for a fee, but files a bankruptcy case in the homeowner’s name. The bankruptcy process temporarily halts all debt collection efforts, including foreclosure proceedings, making it appear as if the scammer has done something to help.
- Mass joinder lawsuits. Scammer, usually an attorney or law firm, will promise the homeowner that the lender can be forced to modify the loan through this type of legal action.
- Short sale schemes. Scammers, sometimes called “short sale negotiators” or “short sale processors,” promise to expedite a short sale and usually require the homeowner to pay a fee for these services.
How much these schemes might cost you
The Department of Justice’s Distressed Homeowner Initiative identified more than $95 million in estimated losses to at least 17,185 victims. In addition, cases filed in federal courts across the country show that at least 19,198 victims suffered an estimated total loss amount of $54 million.
Based on a review of the Federal Trade Commission’s Consumer Sentinel Network, FTC reported that the median amount homeowners paid in foreclosure rescue schemes was $2,500 in 2012. Loan Modification Scam Prevention Network data showed that schemes with attorney involvement often resulted in higher losses for the homeowner. Through February 2013, homeowners alleging attorney involvement in a scheme reported an average loss of $3,449, compared with an average loss of $2,727 for homeowners reporting scams with no attorney involvement.
Image excerpted from GAO-14-17
Watch our AskGAOLive web chat on Foreclosure Rescue Schemes from November 2013: