Jul 16, 2009

Beware of Commercial Mortgage Modification Services

Nothing gets my blood boiling faster than when I see struggling homeowners pay thousands of dollars to hire someone to represent them in a mortgage modification negotiation. My advice is always the same: attempt to hook up with a non-profit HUD-approved housing counselor and dump the commercial service. I also suggest they demand their money back and consider reporting the service to their state's attorney general and the Federal Trade Commission since these services are increasingly illegal.

From the time the foreclosure rates started skyrocketing, self-styled foreclosure-rescue operations landed on at-risk homeowners like locusts on wheat fields. When people still had equity in their homes, the operators of these scams would find ways to separate the mark from his or her home ownership -- supposedly as a temporary means of dealing with the foreclosure. It didn't take long for the home's equity to end up with the scammers and the homeowners to end up on the street.

As home values continued to plummet and homeowners were increasingly underwater on their mortgages, the foreclosure rescue operations turned to charging an up-front fee -- typically in the low thousands -- to replace their previous equity-stripping practices. When modification results were not forthcoming in the face of looming foreclosures, homeowners were told to be patient and that everything was on course. At some point, the homes would be sold in foreclosure and calls to the "rescue" company would go unanswered. 

Quick to respond to these obvious scams, many states have passed new legislation that, among other things, prohibited the collection of "foreclosure rescue" fees prior to the delivery of the service. In addition the Fair Trade Commission recently announced lawsuits in 23 states against perpetrators of these scams. Unfortunately, as is generally true with consumer protection legislation, lawyers have for the most part been exempted from their provisions -- and law firm ads on radio, cable TV and the Internet exhorting people to hire them to handle their modification activities have mushroomed.

Although I have no proof, the timeline of these developments tells me that at least some of these attorneys are simply fronting for the same companies that were scamming homeowners all along. But even if the attorneys are not fronting for foreclosure rescue scams, they might as well be -- as I point out below.

In recent weeks, some of my clients have reported paying law firms between $3000 and $4000 to help them obtain a mortgage modification. They have been told they'll get a refund if the modification doesn't materialize but when they asked for their refund after weeks of no results, they've been told that the modification is still "in the works" and to be patient. A couple of clients who did receive a modification (and who were denied a refund on that basis) were dissatisfied because the modification they received was conversion of their payments to an "interest-only" loan that will reset at an atrocious rate within a year. In answer to their request for a refund, they were told that they got what they wanted -- lower payments in the short term -- and that they would hopefully be able to afford the higher payments that would be waiting for them down the road. Sound familiar? 

Of course, some of the attorneys who provide these services may believe that they provide a good service for the fees they charge. However, to justify taking thousands of dollars away from distressed homeowners for mortgage modification assistance, these attorneys have the moral, if not ethical, burden of explaining to their clients what services they offer that the clients can't get for free from a highly trained, HUD-approved housing counselor. If they can't, it's my opinion that what they are selling amounts to a high-priced scam.

As stated in many of their ads, debt modification attorneys argue that they have more clout than the HUD-approved counselors because they can threaten litigation in appropriate cases. Perhaps there are a few instances where this is true and as a result the homeowner gets fair value of the lawyer's high fee. But in my experience, most banks are hip to this sort of threat and, if anything, will more likely dig in their heels than cave in and agree to do a major modification. Lawyers also often argue that HUD-approved counselors are overwhelmed and therefore not available. Again, this is largely not so. Just get in line and be patient and you'll get quality free help long before a foreclosure occurs.

So to conclude, my advice is to avoid all mortgage modification services, including those hyped by lawyers, that charge an upfront fee -- instead, contact a HUD-approved counselor to help you with your modification. (Simply call 1-888-995 HOPE or click the "Find a counselor" button at the top of the page at www.makinghomeaffordable.gov.)