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Home Foreclosures: 17.2.1 Generally

Foreclosure rescue scams are various types of schemes targeted at homeowners already facing foreclosure and in financial distress.13 When homeowners have significant equity in their homes or when property values are appreciating, foreclosure rescue scams often focus on obtaining title to the home and robbing homeowners of their equity. When homeowners have little equity, scams center on squeezing upfront fees—often thousands of dollars—from borrowers.

Home Foreclosures: 17.2.2 Sale-Leaseback Schemes

A sale-leaseback, or lease-buyback, is complex financing arrangement originally invented for commercial equipment and real-estate transactions.26 In a typical transaction, a property owner simultaneously sells the property to a buyer and executes a long-term lease with the same buyer enabling the seller to retain possession of the property.

Home Foreclosures: 17.2.3 Inter Vivos Trusts

The use of inter vivos trusts is another form of foreclosure rescue scam.40 An inter vivos trust is simply “a trust that is created and takes effect during the settlor’s lifetime.”41 This type of scam is appealing to rescuers for several reasons. It often requires less money up front than many sale-leaseback transactions.

Home Foreclosures: 17.2.4 Loan Modification Scams

After home values dropped in the late 2000s and many borrowers could no longer refinance their way out of foreclosure, many rescuers became high-volume “loan modification specialists.” Loan modification scams are a newer variant of the “phantom help” type of foreclosure rescue scam.48 This scam is most common when borrowers have little or no equity to extract. The pitch by this breed of rescuers is that, for a fee, which can reach several thousand dollars, they will negotiate a loan modification for a financially distressed borrower.

Home Foreclosures: 17.2.5.1 Overview of the Scam

Another type of equity theft scam involves high-pressure home sales. These scams involve strong-arming homeowners into signing a contract to sell their home for far less than the fair market value. The key difference between this scam and the foreclosure rescue scams described elsewhere in this chapter is that in a high-pressure home sale, homeowners typically do understand that they are selling their home.

Home Foreclosures: 17.2.6 Short Sale Related Scams

There are a number of different scams involving short sales. A true short sale is one in which the lender agrees to accept less than the full amount due on the loan in order to clear title and permit the sale to proceed. As long as the lender is part of the process and everyone knows and agrees to the true sale price and the ramifications, there is nothing unlawful about a short sale. Like a foreclosure, however, it has an impact on the homeowner’s credit report. The lender may also insist that the homeowner remain liable for the deficiency.

Home Foreclosures: 17.2.7 Other Scams

Another type of scam preys on a homeowner shortly after the home is sold at foreclosure. In most jurisdictions, the homeowner is entitled to receive any funds from the sale that exceed the amount needed to pay the foreclosure judgment, the costs of the sale, and other liens. But at least one scammer tricked homeowners into signing over the right to receive an exorbitant portion of these surplus funds.98 This scam is normally only viable in a strong real estate market, when foreclosure sales are more likely to generate surplus funds.

Home Foreclosures: 17.3.2.1 The Homeowners’ Story

The client interview process is important to understanding a foreclosure rescue scam transaction. Homeowners’ testimony can make their story come alive. Unfortunately, the speed at which these transactions happen, usually as a result of an impending foreclosure, may leave the consumer confused and unable to remember the details of the transaction. Often, however, they can re-trace their steps and provide at least a general overview of the transaction. Discussing the case in a chronological fashion may also help the homeowner remember what happened next in the sequence of events.

Home Foreclosures: 17.3.2.2.1 The importance of the documents

The documents related to a foreclosure rescue scam can tell a significant part of the story—one that is often more complete than that told by the homeowner. Obtaining any and all paperwork that may exist—from the solicitation materials to deeds and leases to eviction papers—is critical to challenging a foreclosure rescue scam. It is useful to gather as much documentation from the public record as possible before conducting a full interview of the client, so as to make the interview more productive. If this is not possible, a second interview may be necessary.

Home Foreclosures: 17.3.2.2.2 Solicitation materials

Rescuers often identify distressed homeowners through public foreclosure notices in the newspapers, online, or at government offices. Rescuers then contact the homeowner by phone, personal visit, or card or flyer left at the door. In some cases, homeowners can receive dozens of offers for assistance within weeks of the initial public foreclosure notice. Some rescuers rely on advertising on the Internet or in local publications. Others plaster posters on telephone poles and bus stops.

Home Foreclosures: 17.3.2.2.3 Transaction documents

The number of transaction documents in any given foreclosure rescue scam can vary dramatically. At one end of the spectrum, the homeowner may execute only one document—a deed. At the other end, some scams involve complex trust arrangements that may contain ten or more different documents.

Home Foreclosures: 17.3.2.2.4 Local land records

Local land records should be checked to determine a number of important facts in the case. They will show whether the homeowner deeded the home to the rescuer or an affiliate of the rescuer, and whether the transferee deeded or mortgaged it to someone else. Assignments of the mortgage may also be found in the local land records. If the rescuer paid off the existing mortgage, there should be a public record of the release of the mortgage. Local land records can also lead to other cases involving the same rescuer, which is critically important to all of these cases.

Home Foreclosures: 17.3.2.2.5 Court records

A good place to start with court records is any pending eviction case against the homeowner and, in a judicial foreclosure state, the documents from the homeowner’s foreclosure case. Obtaining information about other lawsuits in which the rescuer (or any other party to the transaction) is involved can also be fruitful. The federal courts and some local courts have an electronic public access service. Courts that have electronic access will generally allow you to search the index by party name.

Home Foreclosures: 17.3.2.2.6.1 Payments to rescuer or lender

If the homeowner has been making “rent” payments to the rescuer or has made any other payments to the rescuer, it is useful to obtain evidence of such payments, such as copies of the cancelled checks or money order receipts. In some cases, the homeowners have continued to make payments to mortgage lenders even though they no longer own their homes. Evidence of these payments should also be obtained. The total of these payments will be relevant when calculating damages.

Home Foreclosures: 17.3.2.2.6.2 Rescuer’s loan documents

Rescuers frequently cash out the equity in the home by obtaining a bank loan shortly after obtaining title. These loan documents, and loan documents for any other loan obtained by the rescuer, should be collected and reviewed carefully. You should ask for all documents relating to the loan application, the loan processing, the loan underwriting, the loan approval, the settlement of the loan, and the disbursal of loan funds of all parties involved in the loan process.

Home Foreclosures: 17.3.2.2.6.3 Appraisal

An accurate value of the homeowner’s property is critical for determining what claims the homeowner may be able to assert as well as what outcomes are realistic for the homeowner. As noted above, a disparity between the fair market value of the property and the consideration provided by the rescuer is common in foreclosure rescue scams.

Home Foreclosures: 17.3.2.2.6.4 Reports of consumer complaints

Through state freedom of information acts, records of consumer complaints to local consumer protection agencies, attorney general offices, and licensing divisions can be obtained to see whether similar complaints have been made about the rescuer in the past. The Better Business Bureau should also be contacted for copies of any complaints. In addition, the Federal Trade Commission’s website has a search function that allows users to identify Federal Trade Commission (FTC) complaints filed against any entity.

Home Foreclosures: 17.3.2.2.6.5 Corporate and business documents

Every state requires corporations and other businesses to file certain documents at the time the company begins operation in that state and periodically thereafter. The filing typically consists of the articles of incorporation and annual reports. When dealing with corporations, this information is helpful to figure out who stands behind the corporation or business in the event the corporate veil can be pierced or to sue these individuals separately. Further, formal links between the various parties to the transaction can establish a wider net of liability.

Home Foreclosures: 17.3.2.2.6.6 Internet searches

Using the Internet and other electronic database services to conduct a search on a topic of interest or to discover information about a particular party to the transaction can prove fruitful. As indicated above, any webpages of note should be printed out immediately and possibly also preserved electronically, as the content of websites can be changed quickly.

Home Foreclosures: 17.3.3 Identifying Possible Defendants

Rescuers come in all shapes and sizes and rescue scams can involve a number of different players beyond the rescuer. To avoid missing parties, in what can sometimes be complex real estate transactions, it is generally best to cast the liability net as wide as possible to start.

Home Foreclosures: 17.3.4.1 Need for Quick Action and to Determine the Homeowner’s Goals

Time is often of the essence in fighting foreclosure rescue scams. Many times, these cases first present themselves as eviction cases instead of deed theft or foreclosure rescue cases. It is important to act quickly to stop any eviction proceedings and to get a notice of lis pendens or notice of equitable mortgage recorded against the property to preserve the homeowner’s remedies, especially as to third parties.134

Home Foreclosures: 17.3.4.2 Stop Eviction Proceedings

Many foreclosure rescue scam cases initially present themselves as evictions. Homeowners may not know that they have transferred title to their property and may be confused when they receive notice related to eviction proceedings. While state landlord-tenant laws vary widely, most eviction cases proceed much faster than other types of civil cases. Once a judgment against the tenant has been entered, by reason of default or otherwise, removal of the tenant by the sheriff or other government official may occur within days or weeks.

Home Foreclosures: 17.3.4.3 Reviewing the Deed

Deeds should be scrutinized to determine whether the formal requisites were followed. For example, improper acknowledgment of deeds (or mortgages) may affect the validity of the instrument.