It wasn't long ago that real estate investment truly seemed like a golden ticket. Housing prices skyrocketed as low interest rates and generous financing requirements encouraged more people than ever to venture into home ownership.
But like many cases where things seem too good to be true, the real estate boom quickly revealed its dark side. The housing market plummeted in 2008 as massive numbers of homeowners began missing mortgage payments or walking away from homes they could no longer afford.
Sadly, the mortgage crisis forced many homeowners into foreclosure -- after they failed to make home payments, their lenders exercised their legal rights to repossess the homes. The foreclosure process is long, stressful and complicated, and it comes with an added risk: Con artists and scammers have come up with a variety of fraud schemes that target those involved in foreclosure [source: Miller].
Some foreclosure scams target homeowners on the brink of losing their homes. Others take aim at lenders, and some may even be inadvertently caused by banks overwhelmed by the high number of bad loans in their portfolios. We'll look at 10 of the most notorious foreclosure frauds in recent years, including both cases that made headlines and widespread issues that put homeowners at risk.
Tax Relief ASAP
In 1999, the Federal Trade Commission (FTC) filed a much-publicized judgment against Tax Relief ASAP, a company that claimed it could help homeowners at risk of foreclosure modify their mortgages -- for an up-front fee that in some cases exceeded $5,000. In exchange for that payment, many of the cash-strapped homeowners received excuses for why their cases were "too far gone to fix," rather than actual assistance solving their mortgage issues.
About 1,455 homeowners fell for the scheme, and many of them lost their homes to foreclosure as they waited for Tax Relief ASAP to provide the services it advertised. The FTC recovered enough money in its settlement to pay back roughly 25 percent of the victims' losses but couldn't do anything to help the homeowners who had already gone into foreclosure [source: Waggoner].
This fraud case highlights a common practice of scam artists: After identifying a group of people in a desperate situation, they promise a solution in return for an up-front payment. These scammers often use their time and money to advertise their services rather than helping the clients who have already paid [source: Waggoner].
These scams can be hard to identify, thanks to sophisticated marketing and aggressive sales pitches designed to push victims into their financial trap. Check a company's reputation with your local Better Business Bureau, and be wary of any company that promises to help solve your foreclosure problems for an up-front fee.
The Ibanez Case
The foreclosure process becomes even more complex due to lenders' practices of bundling and selling loans as mortgage-backed securities. A lender who writes a mortgage on your home may turn around and sell it, along with the right to foreclose, to another bank, which may then repeat the securitization process again. As lenders sell the mortgages they've written to other financial institutions, it can become difficult to determine who owns what when a buyer stops paying.
That's exactly what happened in a 2005 case involving U.S. Bank, Wells Fargo Bank and a homeowner named Antonio Ibanez. The lenders -- who bought the Ibanez's mortgage as part of their mortgage-backed securities trades -- couldn't prove to the bank that they had the contractual right to seize the home. Proof of claim simply got lost in the mad shuffle of securities during the housing boom [source: Dayen].
The twists, turns and requirements of the foreclosure process are designed, in part, to protect homeowners from the risk of a large, legally powerful institution taking their homes without recourse. While the banks involved in the Ibanez case didn't intentionally commit fraud to push the foreclosure through, the gaps they failed to close in the process raise alarming questions. Thousands upon thousands of mortgages were packaged and sold as mortgage-backed securities during the real estate boom. If only a fraction were transferred in the incomplete manner of the Ibanez case, financial institutions could face major problems collecting on foreclosed properties in the future.
Foreclosure Fee Inflation
In most foreclosure cases, a lender must serve the homeowners with a summons, notifying them that legal action is being taken to foreclose on their home. This process is coming under increased scrutiny as judges raise concerns about the method of serving summons.
A notable example of this problem appeared in Florida in 2010, when Pasco County Circuit Judge Susan Gardner started taking note of the fees some legal service providers were charging to serve notices to homeowners. While Gardner estimated that the fees associated with a foreclosure in her court should have run no more than a few hundred dollars, she found reports of service providers charging fees of more than a thousand dollars [source: Behnken].
The law firms and legal service companies under the judge's scrutiny argued that the fees reflect the nature of foreclosures in the new millennium. They claimed that, with multiple names on some mortgages and the requirement that defendants be properly served notice in a foreclosure suit, the firms were simply covering the lenders by ensuring that everyone linked to the home had notice of the suits [source: Behnken].
The judge worried these service providers were taking advantage of highly stressed homeowners, who would ultimately have the fees added to the total judgments against them in the foreclosure. Legal actions can move fast -- and fees pile up in a hurry -- in a foreclosure, and that can leave open the door for unscrupulous parties to take more than their fair share of fees.
Fractional Interest Transfers
One of the most insidious types of foreclosure fraud is the fractional interest transfer. According to the Department of Justice (DOJ), this fraudulent practice is slightly more common in West Coast states and can have far-reaching effects on both homeowners and lenders.
The details of fractional interest transfers may vary from scam to scam, but they all involve the homeowner signing over a portion of his or her ownership stake to a company that claims it can stop the foreclosure process. Through a series of moves, such as hiring "straw owners" to take part of the ownership and then file bankruptcy, the scammer is able to delay the foreclosure process. This service often comes at a price, as the homeowner not only gives up a portion of the ownership, but also may pay a monthly fee [source: Limprecht].
In the end, though, these companies rarely, if ever, stop the foreclosure process. Their bankruptcy filings simply stall the process and can sometimes send an unwary homeowner into bankruptcy. DOJ investigations have found that, in many cases, the companies perpetuating these schemes never intend to rescue their clients from foreclosure -- they simply use a series of semi-legal maneuvers to milk as much money out of their victims as they can before the foreclosure is complete [source: Limprecht].
This problem has to be a homeowner's worst nightmare: After dutifully making payments on a home that he or she can afford, the homeowner discovers that some odd twist of the lending process has gone awry and the bank can now repossess the hard-earned home. In the confusing world of the post-crash housing and lending market, it's become a frightening reality for some unlucky homeowners.
These aren't cases of intentional fraud. In some, such as a case where Lender A sold a loan to Lender B, but the homeowner sent payments to the wrong lender, they could be cases of failure to provide proper notice, or failure of the homeowner to keep track of who owns the mortgage. In other cases, such as a home that went into foreclosure because the owner's ex-husband took out -- and defaulted on -- a home equity loan, the actions border on fraud.
A survey of articles on this topic revealed that there might be widespread problems with sloppy, incomplete or confusing paperwork leading to inappropriate foreclosures. The moral is clear: Homeowners should keep comprehensive records of their mortgages, and they would be smart to develop good relationships with their lenders in order to catch the small errors that could turn into major problems if left unchecked [source: Chittum].
Many of the foreclosure frauds mentioned so far include some form of document forgery. But a more widespread -- and more infamous -- problem came not from outright fraud but from lenders trying to keep up with the boom in foreclosures that followed the housing bust.
In 2010, Bank of America, JPMorgan Chase, GMAC's mortgage unit and PNC Financial temporarily halted the foreclosures they had underway after judges in several states ordered reviews of mortgage paperwork [source: International Business Times].
The claims of improper processing generally followed similar lines from state to state: Investigators alleged that banks, in order to process thousands of pieces of paperwork a month on the growing wave of mortgages, directed their staff to "rubber stamp" signatures on paperwork. In some cases, investigators reported finding the same official's name signed in several different hands on different documents [source: International Business Times].
These timesaving moves by banks go against the letter of most states' foreclosure laws, which have steps in place to ensure lenders fully review a mortgage before starting a foreclosure. The implications are hard to predict; although these processes are still under scrutiny, as of early 2011, the banks have been allowed to resume some foreclosures.
The Thorne Case
One of the primary tenets of any legal action is that for a person to complete certain actions for pay, he or she must be licensed to practice law. As banks become increasingly overwhelmed by mortgage defaults and the foreclosure process, their steps to alleviate the workload can violate this rule.
In this 2011 case, Jonathan and Darlene Thorne allege that their lender and its service provider paid unlicensed contractors to complete legal paperwork. Since the foreclosed homeowner ultimately pays these fees, the Thornes charge that the use of unlicensed contractors amounts to fraud [source: Field].
If this case is resolved in the plaintiffs' favor, it could have implications for the entire foreclosure process. Firms that help real estate attorneys wade through the mountains of foreclosure paperwork piling up on their desks could face costly restructuring, and those attorneys could lose the ability to move through foreclosures at a rapid pace. On the other side of the argument, a ruling that tightens the legal requirements for lenders and their attorneys could force them to pay more attention to the details of the foreclosure paperwork, possibly preventing accidental foreclosures from happening [source: Curry].
The Ola Case
This 2011 case from Florida may be one of the more creative -- and destructive -- frauds that's been perpetrated in the wake of the housing bust. Authorities say Pasco County resident George Ola created a series of forged quitclaim deeds (deeds that release ownership of a home to another party) that he used to take possession of several foreclosed homes that had no residents in them. Ola then rented out the homes, posing as a real estate investor with multiple homes that he needed to rent out [source: Linton-Smith].
Real estate property managers notified authorities after Ola repeatedly failed to pay them for work on the houses. That led to the investigation, which revealed the deed fraud. While Ola faces jail time if convicted, a number of his "tenants" face an equally unsettling prospect: They must find new places to live since they had no legal right to be in the homes they rented in the first place [source: Linton-Smith].
Foreclosure fraud like the Ola case is especially ugly because it affects several innocent parties, such as property managers and tenants. But with record numbers of homes sitting empty due to the housing crisis, authorities have to use extra vigilance to catch creative scammers who work to take advantage of the situation.
The Pines Case
Foreclosure is an ugly process that results in a homeowner being removed from his or her home. The sheer trauma of losing the roof over one's head can lead a person to behave in irrational ways, and in at least one case, it led to potential criminal charges against a foreclosure attorney.
Encinitas, Calif., attorney Michael T. Pines was arrested in February of 2011 for allegedly violating a restraining order related to a home he was trying to save from foreclosure. The home's lender had posted security guards at the property during the process, a move they said was prompted by Pines' reputation as a controversial, outspoken foreclosure attorney [source: Amvona].
Police said Pines trespassed on the property and threatened a security guard, then returned the following day and became violent in a confrontation. A video posted at San Diego's 10News.com showed Pines telling a security guard he would "precipitate an armed confrontation" over the property [source: Amvona].
Tempers flare and emotions run high when a family loses its home. But it's a fine line between standing up for a homeowner and subverting the legal foreclosure process by breaking the law. Threats of violence can only make the foreclosure process go from painful to terrible for the parties involved.
The ACORN Case
This 2009 case involved an incident where emotions, civil disobedience and the rule of law collided over a foreclosed home. An activist allied with the Association of Community Organization for Reform Now (ACORN) was arrested in Baltimore after allegedly breaking in to a foreclosed home as a statement of protest [source: Miller].
Representatives with ACORN reportedly said they expected some form of action -- such as the arrest -- and that their goal was to call attention to the boom in foreclosures. The move was meant to put a human face on the process; a foreclosure results in a homeowner or family losing a home, and they were concerned that the emotional trauma inherent in the process would be lost as lenders and courts faced down the mountain of paperwork [source: Miller].
As of 2011, the United States is still grappling with a massive wave of foreclosures, and no party has presented a solution that would protect homeowners while making banks' investments whole. Add to this mix the wide array of fraud schemes that creative criminals, negligent officials and overworked staffers create, and moves like protests, arrests and civil disobedience suddenly seem more reasonable than before. The foreclosure mess is far from being resolved, and homeowners and lenders alike are well advised to remain on high alert for whatever scam is next to hit the market.
For more information on foreclosure, check out the links on the next page.
If you own a home, you most likely have homeowners insurance, but how sure are you about what is and isn't covered? HowStuffWorks takes a look.
- Amvona. "Michael T. Pines Anti-Foreclosure Attorney Arrested While Trying To Save Clients' Home." Feb. 26, 2011. (March 5, 2011) http://www.amvona.com/latest-news/economics/8478-michael-t-pines-anti-foreclosure-attorney-arrested-while-trying-to-save-clients-home.html
- Behnken, Shannon. "Judge wants answers to foreclosure document fees." Tampa Bay Online. Nov. 18, 2010. (March 2, 2011) http://www2.tbo.com/content/2010/nov/18/190741/judge-wants-answers-to-foreclosure-document-fees/news-breaking/
- Bryant, Charles W. "How Foreclosures Work." HowStuffWorks.com. Dec. 6, 2007. (March 2, 2011)https://money.howstuffworks.com/personal-finance/debt-management/foreclosure1.htm
- Chittum, Ryan. "The Landscape of the Foreclosure Scandal." Columbia Journalism Review. Oct. 20, 2010. (March 3, 2011)http://www.cjr.org/the_audit/the_landscape_of_the_foreclosu.php
- Curry, Kerry. "Lawsuits allege fee-splitting at Prommis, LPS." HousingWire. Oct. 5, 2010. (March 3, 2011) http://www.housingwire.com/2010/10/05/lawsuits-allege-prommis-lps-engage-in-fee-splitting
- Dayen, David. "MA Supreme Court Deals Banks a Major Blow on Foreclosure Fraud, in the Ibanez Case." Firedoglake.com. Jan. 7, 2011. (March 2, 2011)http://news.firedoglake.com/2011/01/07/ma-supreme-court-deals-banks-a-major-blow-on-foreclosure-fraud-in-the-ibanez-case
- Ferreras, Alex. "Foreclosure Fraud Bill Passes Out of House Committee and Attorney General Unveils Mortgage and Foreclosure Webpage." LoanSafe.org. March 1, 2011. (March 1, 2011)http://www.loansafe.org/foreclosure-fraud-bill-passes-out-of-house-committee-and-attorney-general-unveils-mortgage-and-foreclosure-webpage
- Field, Abigail. "Are Foreclosure Attorneys Illegally Outsourcing Legal Work to Non-Lawyers?" DailyFinance. Feb. 7, 2011. (March 1, 2011) http://www.dailyfinance.com/story/investing/foreclosure-attorneys-illegally-outsourcing-legal-work-nonlawyers/19830892/
- Freddie Mac. "Avoiding Mortgage Fraud." (March 4, 2011) http://www.freddiemac.com/avoidfraud/
- International Business Times. "Foreclosure scandal: Double whammy for US homeowners." Oct. 11, 2010. (March 2, 2011) http://www.ibtimes.com/articles/70573/20101011/us-home-foreclosures-fraud-documentation-banks-mortgage-lenders-underwater.htm
- Limprecht, Jane. "For $800 and the Deed To Your Home -- Bankruptcy Foreclosure Scams Target Distressed Home Owners." U.S. Department of Justice. (March 4, 2011) http://www.justice.gov/ust/eo/public_affairs/articles/docs/foreclosurescams.htm
- Linton-Smith, Peter. "Foreclosure scam busted in Pasco." MyFox Tampa Bay. Feb. 15, 2011. (March 5, 2011) http://www.myfoxtampabay.com/dpp/news/local/nature_coast/foreclosure-scam-busted-in-pasco-02152011
- Miller, Joshua Rhett. "Arrest Made in Home Foreclosure Civil Disobedience Program." FoxNews.com. Feb. 23, 2009. (March 5, 2011) http://www.foxnews.com/story/0,2933,498669,00.html
- United States District Court, Central District of California. "Temporary Restraining Order With Asset Freeze, Appointment of a Temporary Receiver and Other Equitable Relief." May 27, 2009. (March 2, 2011) http://www.ftc.gov/os/caselist/x000001/090610dmctro.pdf
- Waggoner, Darren. "Foreclosure Rescue Scam Victims To Get Checks." Collections & Credit Risk. March 1, 2011. (March 4, 2011) http://www.collectionscreditrisk.com/news/ftc-mails-redress-checks-to-foreclosure-rescue-scam-victims-3005283-1.html