What is foreclosure fraud?

Having a home in foreclosure is stressful enough. The last thing you need is to become part of an expensive scam.
Having a home in foreclosure is stressful enough. The last thing you need is to become part of an expensive scam.

Buying a home is a complex, time-consuming process. The buyer, lender and seller all have certain disclosures, agreements and legally binding documents they must complete to satisfy the state's requirements. This process is designed to ensure that the buyer and seller both enter the transaction informed, but it can lead to significant stress for all parties.

Likewise, foreclosing on a home involves several steps, disclosures and legal filings. Much like a purchase, the process can be long and stressful. And like many complex financial transactions, it can leave the door open for fraud.

The massive wave of foreclosures that sprang out of the housing market crash created widespread opportunity for scam artists to swindle homeowners and lenders out of millions of dollars. If you reach the point where your home enters the foreclosure process, a little knowledge can help you avoid falling victim to a scam.

Whether you think you'll encounter foreclosure fraud or not, one of the most important things you can do is educate yourself on the foreclosure process. Understanding when various legal documents must be filed, for example, can not only help you ensure you fulfill your obligations in the process, but it can also help you identify erroneous or fraudulent action during the process.

Suppose, for example, that a "mortgage rescue service" contacts you the week after you receive a notice of default from your bank. The service claims that you only have 10 days after receipt of that notice to present a mortgage payment plan to the bank and that they can "rush process the plan" for a fee. If you didn't expect to receive the bank's notice and don't understand how the foreclosure process works, you might be inclined to pay the service whatever it asks.

If you understood your state's foreclosure process, however, you'd know that the initial notice of delinquency or default is only the first of many steps, and that it's early enough in the foreclosure process for you to work directly with the bank to find a solution. You would realize that the service provider's high-pressure sales tactic is a common red flag: An organization that asks for up-front payment to resolve your mortgage problems has a high chance of being part of a scam [source: Freddie Mac].