Your Foreclosure Companion

• Changes in the Ninth Edition
• What You’ll Find in This Book

1. Foreclosure: The Big Picture

• What to Expect
• Your Options: An Overview
• How You Can Stay in Your House Payment Free
• Why Foreclosure Doesn’t Have to Be So Bad
• Don’t Let a Foreclosure “Rescue” Company Scam You
• Beware of Property Preservation Companies

2. Foreclosure Nuts and Bolts

• How Much Time and Notice You’ll Have Before a Foreclosure Sale
• In or Out of Court?
• Deficiency Judgments: Will You Still Owe Money After the Foreclosure? Taxes

3. Can You Keep Your House? Should You?

• The Emotional Part of Foreclosure
• The Economics of Foreclosure: What You Need to Know
• When It Makes Sense to Keep Your House
• When It Makes Sense to Give Up Your House

4. Working Out a Way to Avoid Foreclosure

• Do You Have Enough Time to Work Out an Alternative to Foreclosure?
• Using a HUD-Approved Housing Counselor
• Basic Loss Mitigation Options
• Loss Mitigation Options for Government-Backed Mortgages
• Foreclosure Avoidance Mediation Programs
• Homeowner Assistance Fund Programs
• Special Protections for Servicemembers on Active Duty
• Mortgage Relief for Borrowers After a Natural Disaster

5. How Chapter 13. Bankruptcy Can Delay or Stop Foreclosure

• Using Chapter 13. to Keep Your House
• An Overview of the Chapter 13. Bankruptcy Process
• Coming Up With a Repayment Plan
• Will You Need a Lawyer?

6. How Chapter 7. Bankruptcy Can Delay Foreclosure

• How Chapter 7. Bankruptcy Helps You
• Using Chapter 7. Bankruptcy to Keep Your House
• Using Chapter 7. Bankruptcy to Delay a Foreclosure Sale in Good Faith
• The Chapter 7. Bankruptcy Process: An Overview
• Do You Qualify for Chapter 7. Bankruptcy?
• Will You Need a Lawyer?

7. Fighting Foreclosure in Court

• How to Fight a Foreclosure (And How Long You Can Delay the Sale of Your House)
• When It Might Be Worth Fighting
• The Statute of Limitations Has Expired
• When You Can Sue for Money

8. If You Decide to Leave Your House

• Sell Your Home
• Let the Foreclosure Proceed
• Be Community Minded
• Be Wary of Leaving the Home Before the Foreclosure Sale
• Sell the House in a Short Sale
• Offer the Lender a Deed in Lieu of Foreclosure
• Avoiding Deficiency Judgments
• Income Tax Liability for Deficiencies

9. How Long Can You Stay in Your House for Free?

• When You Miss Your First Few Payments
• After You Receive a Formal Notice of Foreclosure
• The Redemption Period
• After the Sale
• Eviction Lawsuits After Foreclosure

10. Homeowners’ Association (HOA) Liens and Foreclosures

• How HOA Fees Work
• HOA Liens
• How HOAs Collect Overdue Fees
• What If You Break the HOA’s Rules?
• Stopping an HOA Foreclosure
• Potential Defenses If Your HOA Forecloses
• What Happens to Your Mortgage If Your HOA Forecloses?
• How HOA Super Liens Work
• How an HOA Foreclosure Affects Your Credit
• Getting Your Home Back After an HOA Foreclosure

11. Resources Beyond the Book

• HUD-Approved Housing Counselors
• Real Estate Brokers
• Mortgage Brokers
• Lawyers
• Foreclosure Websites
• Books
• Looking Up Foreclosure Statutes

Glossary

Appendix: State Information

Index

Chapter 1
Foreclosure: The Big Picture

Foreclosure doesn’t usually come as a surprise to homeowners. You’ll probably know, well before it happens, that you’re going to have trouble making your mortgage payments. Maybe you’ve lost your job or are facing unexpected medical bills, or perhaps an adjustable-rate mortgage you took out a few years ago is scheduled to reset at a much higher rate, making payments out of reach.

Once you do fall behind, you’ll probably have a few months before your lender starts the foreclosure process, thanks to federal mortgage servicing laws. The fact that foreclosure is a process—sometimes a long one—is good news for you. You don’t need to panic. You’ll have time to plan and evaluate your options—if you act quickly. The more time you have, the better.

If your only problem is a few missed payments, your lender will probably be willing to let you get current over time. If you’ve missed four or five payments, your lender might not be flexible—but you still might be able to work something out.

Don’t wait for your loan servicer to contact you. As soon as you realize you’re going to have trouble making your mortgage payments, you should start working on the problem. This chapter will show you how.

Indecisiveness Can Cost You Big Time

If you’re likely to lose your house, failing to immediately face this reality can cost you thousands of dollars. Here’s why: Any mortgage payments you make now will do you no good if you lose your house in foreclosure. Assume your mortgage payment is $2,000 a month, and you scrape together enough money each month to pay your mortgage because you don’t want to lose your house. If $2,000 is more than you can afford and you end up in foreclosure, the payments you paid will have been for nothing unless you somehow find a way to get current on your mortgage payments or you file and complete a Chapter 13 bankruptcy. On the other hand, if you had stopped paying your mortgage six months earlier, you could have saved $12,000 for relocation costs and other expenses.

 

CAUTION
Don’t panic—and don’t get scammed. Foreclosure rescue scams are common. Almost without exception, you’ll be worse off with these scams than if you let a foreclosure go through. (To find out how scammers work and what to look for, see “Don’t Let a Foreclosure ‘Rescue’ Company Scam You,” below.)

What to Expect

What happens next depends on whether you’re trying to stay in your home or are resigned to moving on. (More about that choice later.)

If you want to keep your home, your first move should be to find a HUD-approved housing counselor to help you figure out what options are best for you, such as a modification, a refinance, or another loss mitigation solution. (“Loss mitigation” is what the mortgage-servicing industry calls the process where borrowers and their loan servicer work together to avoid a foreclosure.)

Housing counselors provide foreclosure-avoidance assistance and won’t charge you for it. Go to www.consumerfinance.gov and search for “Find a housing counselor” or call 800-569-4287 and ask for a HUD-approved counselor in your area.

Your HUD-approved housing counselor will help you determine which option is best for you, explain what documents you will need to provide to your mortgage company, and might contact the mortgage company on your behalf.

If a modification or another foreclosure alternative isn’t possible, and depending on the procedure your state requires, you’ll receive some sort of notice (usually a formal written notice) that foreclosure is coming. Foreclosure procedures differ greatly depending on where you live and the nature of the loan. (Ch. 2 explains these procedures and highlights the variables you’ll want to know about when planning your strategy.)

Unless you use one of the remedies explained briefly below (and in detail in later chapters), the foreclosure will end with the sale of the property, typically at a public auction. The foreclosure process is explained in detail in Ch. 2.

Your Options: An Overview

Here’s a look at your main alternatives when you think foreclosure is on the horizon. We’ll talk about these scenarios in detail later. For now, just try to get an idea of what you’re dealing with.

Your Options If You Are Facing Foreclosure

Reinstate the existing loan by making up the missed payments, plus costs and interest. Arrange a loss mitigation option that keeps you in the home (such as a forbearance, repayment plan, or loan modification) using the help of a free HUD-approved housing counselor. Redeem the property before the sale, like by refinancing the entire loan. Delay the foreclosure sale by filing for Chapter 7 or Chapter 13 bankruptcy. Take out a reverse mortgage if you qualify. Fight the foreclosure in court and either stop or delay it. Give up your house with a short sale or deed in lieu of foreclosure, or simply let the foreclosure happen and live in the home (payment free) during the process.

 

Reinstate Your Mortgage

If you have enough cash or access to another loan, you can “reinstate” your mortgage loan by making up all the missed payments, including principal and interest, plus fees and costs. Your loan contract and state law will probably give you a deadline to complete a reinstatement (or “cure the default”). (You can check your state’s rule in the appendix.) For example, in a California nonjudicial foreclosure, you have the right to reinstate your loan for three months after the lender records a “notice of default.” After that period ends, if you haven’t brought the loan current or worked out an alternative, the lender will send you a notice of trustee’s sale, telling you that the house will be put up for sale 20 days after the end of the 3-month period. California state law provides a further right to reinstate the loan until five business days prior to the foreclosure sale.

Also, many mortgage contracts have a clause giving the borrower the ability to reinstate the loan by a specific deadline. Even if the mortgage contract doesn’t provide this right, lenders often prefer to let you reinstate the loan rather than foreclose.

Arrange a Loss Mitigation Option

As mentioned, you should start with a HUD-approved housing counselor. (See Ch. 4 for more on this topic.) With this assistance, you might be able to get one of the following loss mitigation options.

• Forbearance. In a forbearance agreement, the lender agrees to reduce or suspend your payments for a set amount of time.
• Repayment plan. With a repayment plan, the lender temporarily increases your monthly payment by adding part of the overdue amount to your current payments so that you can get caught up on the loan.
• Loan modification. In a modification, the lender typically lowers your monthly payment by, say, reducing the interest rate, and brings the loan up to date by adding any past-due amounts to the balance of your debt.

RESOURCE
For more information about foreclosure, visit www.nolo.com/ legal-encyclopedia/foreclosure. Learn more about how you can make the most of the foreclosure process, foreclosure do’s and don’ts, ways to delay a foreclosure, and additional foreclosure defenses.

Redeem the Property Before the Sale

To “redeem” the property before the sale, you must pay off the total amount of the loan. All states allow borrowers to redeem the property before a foreclosure sale. (Some states also provide foreclosed borrowers with a “redemption period” after a foreclosure sale, during which they can buy back the home. See Ch. 9.)

If you can refinance at a better rate and pay off your old loan, you can start fresh. Unfortunately, in most cases, refinancing is available only if you have equity in your home and acceptable credit scores. You might be able to refinance your loan even if your mortgage is delinquent, but the odds aren’t good. For the best chance of approval, you’ll need to refinance before you miss any payments. (See Ch. 4 for more information.)

File for Chapter 7 Bankruptcy

If you’re current on your mortgage or can get current before you file, Chapter 7 bankruptcy can reduce your total debt load and help prevent foreclosure in the long run. Chapter 7 bankruptcy is quicker than Chapter 13 (see below), taking approximately three to four months to complete. It’s also inexpensive if you represent yourself, although if you’re worried about losing your home, it’s a good idea to hire a lawyer. Chapter 7 bankruptcy typically will wipe out your unsecured debt— for example, credit card debt, personal loans, medical debts, and most money judgments. Whatever income you were using to pay down those debts can then go toward your mortgage payments.

Even if you’ve decided to leave your house, bankruptcy can help keep you in your home for a few extra months free of charge while giving you a fresh start by wiping out liabilities arising from your mortgage and the mortgage obligation itself.

Despite these benefits, Chapter 7 bankruptcy might not be appropriate for you. For example, you might have more equity in your house than you can protect (exempt) in your bankruptcy, which means that the bankruptcy would trigger an involuntary sale of your home. (Chapter 7 bankruptcy is discussed in Ch. 6 of this book.)

Chapter 7 or Chapter 13 Bankruptcy: A Quick Comparison
	Chapter 7	Chapter 13
Who qualifies	Anyone whose household income is below the state median or who passes a “means test.”	Anyone who has enough income to propose a reasonable repayment plan.
Effect on foreclosure	Delayed two to three months. Chapter 7 doesn’t have a mechanism that will let you catch up on arrearages.	Delayed; possibly avoided. In Chapter 13, you can bring the mortgage current by spreading out arrearages over three to five years.
What happens to your property	The mortgage amount is discharged, but the lien created by the mortgage remains. You must be current and continue making payments to avoid foreclosure and keep the home.	Your first mortgage will remain intact on your residence; second and third mortgages can be eliminated if they are not secured by the house’s value. The mortgage on an investment or vacation home can be reduced to the value of the property, but the entire balance must be paid in the repayment plan.
What happens to your debts	Most debts are wiped out (discharged); some debts, such as child support, student loan debt, and new back taxes, survive.	You repay a percentage of debt over three to five years under a repayment plan. You’ll repay nondischargeable debt in full, such as support obligations and tax debt, as well as mortgage and car loan arrearages. If you finish the plan, the balance on most other debt is wiped out.
How long it takes	Three to four months.	Three to five years.
Will you need a lawyer?	Not necessarily, but it’s a good idea.	Almost always, with little exception.

 

File for Chapter 13 Bankruptcy

In this kind of bankruptcy, you come up with a plan for making your regular monthly mortgage payments and paying off the arrears. If the bankruptcy court approves your plan, you’ll have three to five years to make the payments. Also, Chapter 13 bankruptcy can reduce your total debt load, making your mortgage more affordable in terms of your overall budget. In some situations, you can get rid of a second or third mortgage entirely or reduce a first mortgage on a vacation or rental home to the house’s market value. Chapter 13 bankruptcy is discussed in Ch. 5.

Take Out a Reverse Mortgage

A “reverse mortgage” is one way, though not necessarily a good one, to tap into the equity of your home without selling the house. You get money from a lender and generally don’t need to pay it back as long as you live in the house. The loan must be repaid if you sell your house, move out, die, or fail to comply with the loan contract.

To qualify for the most popular type of reverse mortgage, a “home equity conversion mortgage” (“HECM”), you must have substantial equity and be older than age 62. The Department of Housing and Urban Development (HUD) administers the HECM program, and almost all reverse mortgages are currently made under this program. Getting a reverse mortgage can prevent foreclosure. However, a reverse mortgage has many downsides, including taking part or all of your equity, which leaves less value for you to pass on to your heirs at your death or less money if you decide to sell the home, and high fees.

Even though you don’t have to make payments on the reverse mortgage, you’re responsible for paying the property taxes and insurance, as well as maintaining the property. Lenders must complete a financial assessment before making a HECM loan to make sure that the borrower can afford to keep up with the property taxes and insurance payments. If the assessment reveals that the borrower is likely to fall behind in these expenses, the lender must establish a set-aside account. A “set-aside” is an amount drawn under the HECM that is reserved for payment of these expenses. The account reduces the amount of money the borrower will receive. Reverse mortgages are discussed further in Ch. 3.

RESOURCE
More information about reverse mortgages. To learn more about reverse mortgages, including their many downsides, go to the AARP website (www.aarp.org) and search for “reverse mortgage.”

Fight the Foreclosure in Court

If you can show that the foreclosing party violated federal law, your state’s procedural rules for foreclosures, or the terms of your mortgage agreement, you might be able to derail the foreclosure, at least temporarily.

Some courts require foreclosing parties to present documentary evidence of ownership and authority for bringing the foreclosure action before the process can proceed. And because of how mortgages are sold and resold, this evidence is sometimes missing.

Foreclosure defense attorneys have also uncovered instances of servicer mistakes when handling loan accounts, defective foreclosure documentation, and statute of limitations violations.

Finally, violations of federal fair lending rules and other federal and state laws regarding consumer transactions could also provide a defense against foreclosure. (Fighting foreclosures in court is discussed in Ch. 7.)

TIP
Extra protections for service members. If you’re on active duty in the military, or have been on active duty within the previous year, and you took out the mortgage loan before your period of military service, you can delay the foreclosure lawsuit—and get other help as well. (See Ch. 4.)

Give Up Your House

For some people, it makes good economic sense to give up the home and move on. If you arrive at this decision, you’ll want to choose the method that causes the least financial and emotional upset to you and your family. (Learn more about making this decision in Ch. 3.)

Let a Foreclosure Happen

Although this book covers several basic approaches to giving up your home, sometimes the best approach is to stop all further mortgage payments. While the foreclosure process moves along, which can take months, you don’t have to make payments, resulting in sizable savings. You can then put these savings toward getting a new place to live. The subject of letting a foreclosure happen is discussed throughout this book, most specifically in Ch. 8. Here, we give you a brief overview of the subject.

The most common reason people decide to let a foreclosure proceed is that the mortgage has become unaffordable due to an increased interest rate, the loss of employment, or some other unexpected occurrence. Even after a mortgage modification, circumstances might still make the loan unaffordable.

Still, even if your situation isn’t improving, a better option might be available to you, such as a short sale or a deed in lieu of foreclosure. You might even get some money to help with your relocation costs if you complete one of these options. (For more on this topic, see Ch. 8.) Aside from not being able to get a loan to buy a new home for several years after a foreclosure, taking this tactic can lead to other negative consequences:

• In most states, you can be sued for the difference between the amount your house was sold for at foreclosure and the amount you owed at the time of the foreclosure sale. Your liability for this difference, called a “deficiency,” can be discharged in bankruptcy, but if bankruptcy isn’t for you, you could be stuck with a large debt.
• The mortgage lender might write off the deficiency as a loss. The amount of the deficiency might then turn into taxable income for you. This tax liability can be avoided in several ways—including declaring insolvency or bankruptcy—but if you don’t qualify for one of the exceptions, you can be on the hook for a lot of money. More information about the potential tax liabilities related to foreclosure is provided in Ch. 8.

Strategic Defaults

Walking away from a home when you can afford to pay the mortgage has been labeled a “strategic default,” and it was a common tactic during the Great Recession and related foreclosure crisis. Generally, the term “strategic default” implies a different situation than a homeowner who’s struggling financially and can’t afford to keep making the mortgage payments. The default is “strategic” because the homeowner voluntarily chooses to default after completing a cost-benefit analysis. Usually, people who walk away do so because the mortgage is deeply underwater, and they bought the house as an investment rather than a place to live. Several risks are involved for those who choose this route. If you strategically default, you probably won’t be eligible for a Fannie Mae- backed mortgage for seven years from the date of the foreclosure. In the past, Fannie Mae has stated that it will take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on their loans in jurisdictions that allow for deficiency judgments. Rather than strategically defaulting, you might be able to give up the home through a short sale or deed in lieu of foreclosure. Fannie Mae and Freddie Mac will let some borrowers who are delinquent or current on their payments give up their properties under special deed in lieu of foreclosure programs if the borrowers meet certain criteria. These programs could provide an alternative to strategic default for some borrowers. (For more on this topic, see Ch. 8.)

 

Arrange a “Short Sale” to Avoid a Foreclosure

You can ask your lender for permission to sell your house for less than the amount you owe on your mortgage loan. This kind of sale is called a “short sale.” If you live in a state that allows your lender to sue you for the deficiency (the difference between the amount you owe on the mortgage and the sale price of your home), a short sale can be a good idea, but only if you get your lender to agree in writing to let you off the hook for the deficiency. However, keep in mind that you might face tax consequences if the lender forgives the deficiency.

If you have a second or third mortgage, you’ll also need to get those lenders to sign off on the short sale. Getting all lenders to agree to the transaction might be difficult because, by definition, a short sale produces less than is owed on the first mortgage, and the holder of the second or third mortgage stands to get little or nothing from the deal. If you can talk the first mortgage lender into giving some of the proceeds from the sale to the second and third mortgage lenders, you’ll have a better chance of getting the deal done.

Another pitfall of short sales is that the buyer of your home will probably want you to leave immediately after the sale closes. This requirement won’t be a problem if you don’t mind leaving, but you’ll miss out on the opportunity to save money while living in the house during a foreclosure without making mortgage payments.

Hand Over the House With a Deed in Lieu of Foreclosure

You might be able to get your lender to let you deed the property over so that no foreclosure is necessary; this transaction is called a “deed in lieu of foreclosure.” But before you go this route, you’ll want to have a written agreement that the lender won’t go after you for any deficiency. With a deed in lieu of foreclosure, the deficiency amount is the difference between the total debt and the property’s fair market value. Again, you might face tax consequences if the lender forgives the deficiency.

This remedy won’t be available if you have second or third mortgages on your home because those lenders won’t get anything out of the deal. Also, a deed in lieu of foreclosure isn’t a good choice if you have a lot of equity in the property. Instead, consider selling the home rather than voluntarily handing it to the lender. If you don’t have enough time to sell the property because a foreclosure sale is coming up, you might want to consider filing for Chapter 13 bankruptcy with a plan to sell the home.

How Will Your Choice Affect Your Credit?

Foreclosures, short sales, and deeds in lieu of foreclosure are all bad for your credit. Only a bankruptcy is worse. If you avoid owing a deficiency with a short sale or deed in lieu, your credit scores probably won’t fall as much, but overall, these events are pretty similar when it comes to how they affect your credit. It’s virtually impossible to predict how much damage a foreclosure, short sale, or deed in lieu of foreclosure will do to your credit. For one thing, credit scoring systems change over time. For another, credit scoring agencies don’t make their formulas public, and your scores will vary based on your prior and future credit practices and those of others with whom you are compared. But it also depends, in large part, on your credit before you lose your home. Most people who resort to foreclosure, short sale, or a deed in lieu of foreclosure have already fallen far behind on mortgage payments. According to experts, late payments cause a huge dip in your credit scores, which means that a subsequent foreclosure won’t matter as much because your credit is already seriously damaged. If you’re one of the rare homeowners who hasn’t missed a payment before doing a short sale or deed in lieu of foreclosure, those events will cause more damage to your credit. For more information on the subject of consumer credit and how to rebuild it, see Credit Repair: Make a Plan, Improve Your Credit, Avoid Scams by Amy Loftsgordon and Cara O’Neill (Nolo).

 

How You Can Stay in Your House Payment Free

If early on, you decide that you don’t want to keep the house and will ultimately be moving on, you’ll be able to skip payments for several months before the foreclosure process finally begins. If you apply for a modification once the foreclosure starts, the proceedings are put on hold pending an assessment by the mortgage servicer regarding whether you qualify for a payment reduction or some other loss mitigation option (see Ch. 4). During this time, you don’t have to make any payments. After the foreclosure sale, the chances are good that you can keep living in the house for at least a little while longer free of charge. You might be able to live in the home during the redemption period if state law provides one. (See the information for your state in the appendix.) And, in some states, you can stay in your house until the new owner gives you a formal written notice demanding that you leave and a court orders you out after you receive notice and a hearing is held. Though, generally, it’s best to vacate your home after you get the notice demanding that you leave and avoid a formal eviction.

Having payment-free shelter for many months—before the foreclosure action is brought, during the foreclosure, and perhaps after the sale—gives you a golden opportunity to save some money. And those savings can make it easier to find a new place to live. (See Ch. 9 for more on how to come out of foreclosure with some cash in your pocket.)

Why Foreclosure Doesn’t Have to Be So Bad

Home ownership can be overrated. People often assume that owning a home is superior to renting one, especially if you have a family.

However, home ownership isn’t an automatic key to happiness. (We go into this in more detail in Ch. 3.) For now, just try to be open to the possibility that renting rather than owning isn’t always a bad way to go and that your particular dream doesn’t have to include home ownership. And, even if you go through a foreclosure, you’ll likely be able to buy another home eventually if you decide you want one.

TIP
Getting a new mortgage loan after foreclosure. To be eligible for another mortgage loan following a significant derogatory credit event—such as a foreclosure, short sale, or deed in lieu of foreclosure—Fannie Mae and Freddie Mac, for example, require a waiting period and reestablished credit. In general, the waiting period is seven years after a foreclosure. But if you’ve gone through a job layoff, divorce, or have incurred significant medical bills, and you can document the event’s impact on your finances, the waiting period is typically three years. For other kinds of loans, the waiting period before you can get a new mortgage loan generally ranges between two and eight years following a foreclosure.

Don’t Let a Foreclosure “Rescue” Company Scam You

If you’re going through a foreclosure, you might receive an offer of help from a foreclosure rescue company. These scammer companies go through public records and contact homeowners who’ve received foreclosure notices. The con artists who run these businesses will tell you that they have resources unavailable to HUD-approved housing counselors and that they care about you and will find a way for you to save your property from foreclosure. But unlike HUD-approved housing counselors, these scammers aren’t really trying to keep you in your home; they’re trying to make money. If you have equity in your house, they go after it. And if you’ve only got money in the bank, they’ll go after that, instead.

Scams That Target Home Equity

If you have significant equity in your home, you’re a prime target for the mortgage rescue scams aimed at getting ownership of your house away from you.

One common trick that sounds especially good involves a scammer saying, “We’ll buy your house right now—just temporarily, of course. We’ll make the mortgage payments. You can stay right where you are, lease the house from us, and buy the house back when the loan is paid off.”

How to Protect Yourself

Never rely on an oral promise, such as, “Don’t worry; you’ll get the deed back in no time.” Get everything in writing. Never sign an agreement unless you understand every word and phrase in it, even if you’ve had help from a HUD-approved housing counseling agency. Never sign anything that has blank lines or spaces. Representations and information you had no knowledge of can be inserted and appear to be part of the signed agreement. Never transfer ownership of your property to the “rescuer” or a proposed third-party lender. Never accept a loan that you can’t afford or that must be paid back quickly at a high interest rate as a condition of staying in your house. Better yet, don’t deal with a foreclosure rescue company at all.

 

But what really happens is that the scammer takes out a new loan on the property, using up all the equity. To make things worse, you’ll probably discover that the lease includes a rental price you can’t afford and virtually no chance you’ll ever be able to get the home back. The scammer then might move to evict you for failing to pay the rent.

Eviction comes quickly because you have only the status of a tenant under the lease or rental agreement that was supposed to be temporary. By contrast, if the house had gone through foreclosure, you would have been able to stay there for months payment free as the foreclosure process wore on.

Another scam involves wresting ownership away from the home- owner without the homeowner’s knowledge. The scammer says, “We’ll work out a deal with the lender for you to keep the home. We’ll handle everything—just send your mortgage payments to us, and we’ll pass them on to the lender.”

But the papers you sign actually transfer ownership to the company. This scam can easily be accomplished because people expect legal documents to be full of gibberish they don’t understand or don’t notice that the documents they sign have blank lines that can be filled in later with terms they never agreed to. In this transaction, you’ll likely be completely unaware that you’ve signed over ownership of your home to the scammer. Like a leaseback scam, the company then strips the equity from the property or sells the property to someone else, leaving you without equity or a foreclosure alternative.

If You Don’t Have Much Equity

If you have little or no equity in your home, you probably won’t be approached by anyone who wants title. What would be the point? Instead, for a large up-front fee—often in the thousands of dollars— the scammer offers to help you stop a foreclosure by finding you an affordable loan or by getting your lender to agree to a mortgage modification, an interest rate freeze, or an arrangement in which your missed payments get added to the end of your loan. Not only will you not get results, but these people will probably disappear once your money is in their hands.

In a common loan modification scam, the scammer claims they’ll “negotiate” a loan modification for you for a fee, which might be as high as several thousand dollars. Most of these scams involve collecting an up-front payment from you and then doing little or nothing to get a modification. Scammer companies often either don’t complete the modification process or never contact the lender or loan servicer in the first place.

Loan modification companies exploit a homeowner’s trust and desperate situation by:

• charging exorbitant fees for services the homeowner could easily perform on their own, like contacting the servicer and asking for a loan modification application (no secret skills are involved in “negotiating” a modification—you submit an application, and the servicer will let you know if you qualify)
• charging fees for services and then not doing anything to earn them, or
• taking steps that actually hurt the homeowner, like missing deadlines, sending the wrong documentation to the servicer, failing to return the servicer’s calls, or allowing a foreclosure sale to happen.

When you realize the company is just running a scam, you might not have enough time to reinstate the loan, work out an alternative to foreclosure, sell the home, or find effective assistance.

In almost all cases, you’re better off applying for a modification directly with the servicer on your own or with the help of a HUD- approved housing counselor or a reputable foreclosure attorney. But be aware that some companies advertising modification services claim to use lawyers. Usually, this claim is outright false, or the attorney has little or nothing to do with your file. So, avoid attorneys affiliated with loan modification companies.

Mass Joinder Lawsuit Scams

In a “mass joinder” scam, a group claiming to be a law firm (often it’s not a law firm at all or they use unqualified attorneys) sends out unsolicited mailings inviting distressed homeowners to participate in a lawsuit. The mailing informs you that you can join together with other homeowners to sue your lender and force it into providing loan modifications or stopping foreclosure. You then call the number listed on the mailing and talk to a sales representative who provides false information or makes misleading claims about the success of such a suit. To join in the mass joinder lawsuit, you must pay up-front legal fees that can range from $5,000 to more than $10,000. Typically, once the scammers have taken your money, they either do nothing and disappear with the funds or file untenable lawsuits that end in dismissal.

Forensic Loan Audit Scams

In a forensic loan audit scam, you pay a company an up-front fee of several hundred dollars for a so-called “forensic loan auditor” or “foreclosure prevention auditor” to review your mortgage loan documents to determine if your lender complied with mortgage lending laws. Companies offering this type of service often claim that the audits find lender violations 90% of the time. They further claim that if a forensic loan audit finds violations of the law, you can use the results to stop a foreclosure, force the lender to give you a loan modification, lower the amount you owe, complete a short sale, or rescind (cancel) your loan.

But forensic loan audits aren’t effective in accomplishing any of these things. First of all, the “audit” is typically completed by a processor who simply plugs information from your loan origination documentation into loan compliance software, which then supposedly identifies violations and compiles them into an automated report. Secondly, often only minor violations are found. Even if the audit does find fraud, predatory lending, or other significant violations of state or federal law, you would need to file a lawsuit against the lender either as an answer to the lender’s judicial foreclosure complaint or as your own lawsuit in a nonjudicial foreclosure to stop a foreclosure. Sending a copy of the audit report to the lender or telling it that you had a forensic loan audit done will have no effect on your foreclosure. Even if you file a lawsuit and win, your lender doesn’t have to modify your loan, reduce your debt, or let you do a short sale. And if you’re able to cancel your loan, you’ll have to repay the money you borrowed, and you might lose your home.

Profile of a Scammer: What to Look For

The people who prey upon homeowners in foreclosure use many tactics to gain your trust. Be wary of anyone who: contacts you by phone, text, email, or mail or knocks on your door (anyone offering legitimate foreclosure help won’t seek you out; you must go to them) provides little or no information about the foreclosure process claims government affiliation uses “affinity marketing”—Spanish speakers marketing to Spanish speakers, Christians to Christians, senior citizens to senior citizens, and so on offers “testimonials” from other customers claims the process will be quick and easy (dealing with foreclosure is never quick and easy) and uses messages such as “Stop foreclosure with just one phone call” or “I’d like to $ buy $ your house” or “Do you need instant debt relief and CASH?,” or tells you to cease all contact with the mortgage lender.

 

Securitization Audits

In a process called “securitization,” mortgage loans with similar characteristics are pooled and then sold on the secondary market, often to a trust. A securitization audit will supposedly reveal whether your loan was securitized and, if so, whether the securitization was done correctly. But securitization audit reports usually just give you publicly available information and make unsupported conclusions of law that aren’t useful.

Short Sale Scams

Here’s how a short sale scam might work. A business calling itself a mortgage company offers to buy your home in a short sale, using the supposed purchase money to pay off the lender. You sign the deed over to the company. The company then convinces you that it will deal with the servicer (for one reason or another) and that you should move out because the lender won’t approve a short sale unless you do. Then, instead of paying the lender, it turns around and sells the house to an unsuspecting buyer or rents it out, pockets the proceeds, and disappears when the lender moves forward with the foreclosure. You’re not only out of your house, you’ve paid nothing to the lender and still owe the entire mortgage balance.

State and Federal Laws Governing Foreclosure Consultants

If a company approaches you using the above tactics, it very well might be breaking the law. Many states have laws governing the activity of foreclosure consultants. In addition, in 2010, the Federal Trade Commission (FTC) set rules regulating “mortgage assistance relief services” (MARS) in an effort to protect homeowners from foreclosure consultant scams. Among other things, the MARS rule, now known as “Regulation O,” requires MARS providers to make certain disclosures about their services, prohibits advance fees, and bans certain misleading advertising claims. The FTC and the Consumer Financial Protection Bureau (CFPB) enforce the MARS regulation. To lodge a complaint with the FTC about a MARS company (in English or Spanish), call 877-FTC-HELP (877-382-4357), or go to www.ftc.gov. You can also submit a complaint with the CFPB at www.consumerfinance.gov.

To learn more about the MARS regulation, go to www.ftc.gov and search for “Mortgage Assistance Relief Services Rule” and follow the link.

Beware of Property Preservation Companies

Mortgage servicers hire property preservation companies to secure homes when homeowners move out before the foreclosures are complete. Over the years, many homeowners have reported property preservation companies illegally changing locks, removing belongings, or taking other actions while the homeowners were still living in their homes.

The Lender Might “Secure” Your Home If Vacant

While you have the right to occupy the home during foreclosure, if you abandon (move out of) the place during the process, most mortgages give the lender the right to do whatever is reasonable or appropriate to protect its interest in the property. For example, the lender could do the following things to secure a vacant property:

• enter the property to make repairs
• change the locks or padlock the entrance
• replace or board up doors and windows
• remove debris or trash
• have utilities turned on or off, and
• eliminate building or other code violations or dangerous conditions.

Generally, the task of securing the home falls on the mortgage servicer on behalf of the lender, which typically farms out these services (called “field services”) to property management firms, which are called “field service companies” or “property preservation companies.” Property preservations companies are hired to inspect, clean, and secure abandoned homes. Unfortunately, however, these contractors can get it wrong and clear out homes where people are still living. They might prematurely change your locks, remove your belongings, or take other actions even though you’re still living in your house.

How the Process Works

When you fall behind in your home mortgage payments or go into foreclosure, the servicer will usually hire someone to do a drive-by inspection to figure out if the home is occupied or vacant. If the inspector determines that the home is vacant (sometimes mistakenly), the servicer might take steps to secure and maintain the home, such as making sure that trash is picked up and that the home is protected against the weather. In too many instances, though, property preservation companies have been known to let themselves into currently occupied homes, causing damage and illegally taking the homeowners’ personal property.

Tips to Keep the Lender From Treating Your Occupied Home as Vacant

If you’re in foreclosure, you want to make sure your home and your belongings are protected. Here are several steps you can take to ensure that your mortgage lender or servicer (or the field services company that it hires) doesn’t treat your occupied home as vacant.

Call your lender/servicer when you’re late in payments. If you’re behind in your payments, call the mortgage lender or servicer (the company you make your payments to) and let it know you still live in the property. (To figure out who your loan servicer is, look at your monthly mortgage payment coupon.) All loan servicers keep communication logs that note each time you call and include information about the conversation. While the communication logs are not especially detailed, if later on a dispute arises about the property’s occupancy, at the very least there should be a note in the servicer’s records that you said you are still living there. When you call, you can also ask about loss mitigation options.

Inform your loan servicer in writing that you’re still living in the property. You can also send a letter or email to the lender or servicer informing it in writing that you’re still occupying the property. If you write a letter, send it by certified mail, return receipt requested, so you can prove that you sent it and that the lender or servicer received it.

If the field service company leaves a notice, call it too. A field service company might post a notice informing you that it has deemed your property vacant before locking you out. If so, be sure to call the company and let it know that you’re still living in the home. It’s also a good idea to send a letter via certified mail, return receipt requested, to prove that you’ve notified the company of your occupancy.

Even if you take all of these precautions, a property preservation company might still lock you out or illegally take your belongings. If this happens, consult with an attorney to figure out your next steps.

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