Be Wary of Foreclosure “White Knights”–These Scamsters Won’t Rescue You and May Get You in Deeper Trouble

December 17th, 2008 by Mike Hinshaw

Even though they realize that one of the practical aspects of filing Chapter 13 is stopping foreclosure, many homeowners try alternatives–with varying degrees of success.

One of the worst — but increasingly problematic — alternatives is depending on so-called “foreclosure rescue companies” who turn out to be swindlers.

Although such scams have been around for years, experts and authorities from New York to Hawaii are warning homeowners to exercise great caution as the numbers of U.S. foreclosures continue in record numbers.

In Texas, Attorney General Greg Abbott and state Sen. Craig Estes (R-Wichita Falls)  on Dec. 10 announced new legislation that targets  what Abbott calls “unscrupulous operators [who] are scheming to profiteer at homeowners’ expense.”

“Too many scam artists attempt to target homeowners with large fees and the false promise that they could help Texans avoid foreclosure on their homes,” said Abbott. “The legislation that Senator Estes and I encourage the Legislature to pass would give the Office of the Attorney General increased authority to crack down on these unlawful foreclosure rescue scams.”

The Federal Trade Commission not only lists many proactive steps for homeowners facing foreclosure and but also describes three common patterns of foreclosure-rescue scams:

  • The foreclosure prevention specialist: The “specialist” really is a phony counselor who charges outrageous fees in exchange for making a few phone calls or completing some paperwork that a homeowner could easily do for himself. None of the actions results in saving the home. This scam gives homeowners a false sense of hope, delays them from seeking qualified help, and exposes their personal financial information to a fraudster.
  • The lease/buy back: Homeowners are deceived into signing over the deed to their home to a scam artist who tells them they will be able to remain in the house as a renter and eventually buy it back. Usually, the terms of this scheme are so demanding that the buy-back becomes impossible, the homeowner gets evicted, and the “rescuer” walks off with most or all of the equity.
  • The bait-and-switch: Homeowners think they are signing documents to bring the mortgage current. Instead, they are signing over the deed to their home. Homeowners usually don’t know they’ve been scammed until they get an eviction notice.

In November, the Honolulu Advertiser ran an Associated Press story describing another variant of the rescue scam, one in which homeowners were allegedly bilked to the tune of more than $300,000 by the offer of “bogus foreclosure rescue bonds.”

In those cases, according to the Advertiser, “homeowners were charged between $2,500 and $10,000 to attend seminars or counseling sessions on avoiding foreclosure. They were told they would receive bonds worth $1 million that could be used to pay off the outstanding balance of the mortgage.”

As you might imagine,  no mortgages were paid off. And the scheme in Hawaii included an aspect common to almost every state where the schemes have been reported:  the fake mortgage counselors “told their clients to ignore letters from banks that threaten foreclosure because they were monitoring the situation and would respond on their behalf.”

Authorities in every state advise homeowners facing foreclosure to contact the offices of the various Attorneys General, their local HUD agencies, or both. Falling victim to these swindlers may not only cost money that could be better spent on a new arrangement with lenders or an orderly bankruptcy proceeding but also could further degrade homeowners’ credit ratings–all without doing anything to reduce the threat of foreclosure.