What Is Foreclosure Fraud?

While the specific steps in a foreclosure may vary from state to state, they typically include certain major actions. If you miss a mortgage payment, the lender will first contact you with a notice of delinquency or a notice of default (the name varies by state). This notice will outline what you need to do to bring the mortgage current. Most likely, you'll need to pay the entire amount owed plus a late payment penalty [source: Bryant].

If you're unable or unwilling to make the necessary payments, the lender may initiate a foreclosure sale. This can involve a suit brought against you by the lender, or it may involve a power-of-sale process, in which the lender conducts a foreclosure sale with judicial oversight but no lawsuit. The difference depends on state laws. In both cases, however, there may be opportunities to make a final payment to halt the foreclosure. More realistically, since the amount owed may be very high, you may be able to negotiate a payment plan with the lender at the start of this step.

If you can't reach an agreement with the lender, they move forward with the foreclosure. Often, state laws require the lender to notify all parties attached to the property of the sale. This can be a time-consuming process, and as it adds steps to the foreclosure, it opens doors for fraud to take place.

Finally, once a house is sold through foreclosure, the lender may seek a judgment against you for any amount owed above and beyond what the sale generated. If the house you borrowed $100,000 to buy only fetches $80,000 at auction, you're still responsible for the remaining $20,000, and the bank can pursue you for that sum.

Once you've researched the foreclosure process in your state, you'll be well-equipped to avoid fraud. Most cases of fraud become apparent when the scammer tries to rush or delay the foreclosure process -- be wary of people who say they need a payment immediately or claim that they have a secret method of stalling the foreclosure process. Most likely, that payment will do little, if anything, to resolve your foreclosure, and the stalling tactics, which can include bankruptcy or steps that drive you deeper into debt, could leave you facing worse consequences in the end [source: Freddie Mac].

Likewise, understanding the process allows you to keep an eye on the bank and make sure that it complies with the law during the foreclosure process. If the bank skips, rushes or seems to delay a step, you should ask questions -- or have an attorney ask questions -- to find out why the bank deviated from state-mandated steps and schedules. This could be a sign that the lender is perpetuating a fraud or is simply being lazy or negligent in the process. Either situation could jeopardize the lender's ability to foreclose on the house [source: Dayen].

Foreclosure is frightening. It can cause an immense amount of stress in your life and can ruin your credit for years after the fact. Fraud during this process is not only a possibility (you're stressed, tired and susceptible to scammers' tricks during this time), but also a threat that can turn the foreclosure process into a true nightmare. The best protection against this happening is to avoid foreclosure in the first place: Plan a home purchase carefully and make sure the mortgage will fit into your budget. Manage your finances with an eye toward meeting your loan obligations, and you'll have taken the best possible step to protecting yourself from foreclosure fraud.

For more information on foreclosure, check out the links below.