If you are facing foreclosure, you may receive a mailing from a mortgage loan modification company offering to help you save your home. These types of offers are often a scam. Read on to learn more about loan modification scams and tips on how to avoid them.
(To learn about other types of scams surrounding foreclosure, visit our Foreclosure Rescue Scams area.)
Understanding Loan Modification Scams
Any solicitation or mailing that you receive from a loan modification company will probably look official. Maybe the name of the company makes it sound like they are affiliated with a government program or perhaps the letter looks like it is from a law firm. In some cases, the mailing will contain the words "federal," "HAMP," "Making Home Affordable," or other words related to official U.S. government programs. These are all common ploys to get you to call the company. Once you do, the primary goal of a scammer loan modification company is to get you to sign up for its loan modification services.
A representative of the company will tell you that, for a fee, they can negotiate with your lender to modify your loan. Loan modification scammers prey on desperate homeowners and the sales representative may say virtually anything in order to close the deal.
For example, to put your mind at ease, the sales representative may tell you that:
- they have helped “thousands” of satisfied homeowners save their homes from foreclosure by negotiating favorable loan modifications
- the company is “attorney-backed”
- the company has been in business for a long time, 10 or 20 years, and
- that they offer a money-back guarantee.
The sales representative might also tell you to stop talking to your lender and let them take care of all the negotiations. If you don’t have money available to pay for the loan modification services, the sales representative might even tell you to pay the fee rather than your monthly mortgage payments.
Forensic Loan Audits and Securitization Audits
The loan modification company’s sales representative may also try to convince you to pay for a “forensic loan audit” or “securitization audit” to improve your chances of getting a loan modification and avoid foreclosure.
In a forensic loan audit, a so-called forensic loan auditor reviews your mortgage loan documents to determine if your lender complied with the law. If violations of the law are found, you can supposedly then use the results to force the lender to give you a loan modification. In reality, the audit is usually completed by a processor who simply plugs information from your loan origination documentation into loan compliance software, which then spits out an automated report. Often no errors or insignificant errors are found. And while federal law does allow you to sue your lender if there are errors in your loan documents in some instances, even if you win the case, your lender is not required make your payments more affordable by modifying your loan.
A securitization audit purportedly reviews the legality of the process of bundling multiple mortgages into securities. It will supposedly tell a homeowner if his loan has been securitized, and if so, whether it was done correctly. However, securitization audit reports generally just compile publicly available information and make unsupported conclusions of law that are of no use when seeking a loan modification.
In fact, there's no evidence whatsoever that these audits are effective in convincing a lender to give you a loan modification or any other kind of foreclosure relief.
What Can Happen After the Scammer Gets Your Fee
The ultimate goal of a scammer loan modification company is not to help you modify your mortgage loan. It just wants to collect a big fee. So, once you have paid the company, the scammer typically either:
- puts in no effort to get your loan modified and disappears with your money
- does very little and then refuses to give you a refund after your lender denies a modification, or
- obtains an unaffordable loan modification offer from your lender and pushes you to accept it.
Tips to Help You Avoid Becoming the Victim of a Loan Modification Scam
Here's some things to watch out for.
Watch Out for Dubious Claims or Guarantees
If a loan modification company claims to have obtained loan modifications for 90% of its clients or guarantees that it can stop a foreclosure, be skeptical. A reputable housing counselor will not guarantee that the foreclosure process will be stopped. If you think the company might be misleading you or sounds too good to be true, check your local Better Business Bureau or state consumer protection office to find out if any complaints have been filed and if the organization is legitimate.
Don't Pay Upfront Fees
If a loan modification company demands a large upfront fee from you, beware. Many states have laws prohibiting loan modification companies from collecting money before services are performed, as well as other restrictions on foreclosure rescue activities. Additionally, in 2010, the Federal Trade Commission implemented the mortgage assistance relief services (MARS) rule to protect consumers from unscrupulous foreclosure consultants. To learn more, see our article Federal Law Protecting Homeowners from Foreclosure Scams.
Don’t Pay the Loan Modification Company Instead of Your Lender
If a loan modification company advises you to pay its fee instead of your mortgage payments, do not take this advice. The company could take your money and leave you high and dry without a loan modification. Then you you'll be even further behind in your mortgage payments.
Don’t Ignore Your Lender or Loan Servicer
If a loan modification company tells you to stop communicating with your lender, this is a red flag. Do not ignore your lender’s letters or phone calls. You need to keep the lines of communication with your lender open if you want to save your home.
Contact the Lender About a Loan Modification Yourself
There is no trick or secret skills involved in “negotiating” a loan modification. You submit your application and your lender will let you know if you qualify for any government or proprietary modification programs.
(To learn more about applying for a loan modification and other workout options, see our Alternatives to Foreclosure area. And for information about government programs that can help you, see our Government Foreclosure Assistance Programs topic area or go to www.makinghomeaffordable.gov.)
Work With a Nonprofit, HUD-Approved Counselor
If you feel you need help, you don’t have to pay a large fee to a for-profit loan modification company. You can get free foreclosure prevention counseling from a HUD-approved housing counseling agency. Go to HUD's website at www.hud.gov or call 1-800-569-4287 for more information.
Reporting a Loan Modification Scam
If you think you've been a victim of a loan modification scam, contact:
- the Federal Trade Commission (1-877-FTC-HELP or www.ftc.gov)
- your state Attorney General’s Office, and/or
- your local Better Business Bureau.
Reporting unscrupulous loan modification schemes can help prevent others from becoming victims as well.