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].
Understanding the Process
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.
Protecting Yourself from Fraud
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 on the next page.
- Bryant, Charles W. "How Foreclosures Work." HowStuffWorks.com. Dec. 6, 2007. (March 2, 2011)https://money.howstuffworks.com/personal-finance/debt-management/foreclosure1.htm
- 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
- Freddie Mac. "Avoiding Mortgage Fraud." (March 4, 2011) http://www.freddiemac.com/avoidfraud/