Subprime lenders find new jobs as questionable loan modification specialists, investigation shows

Today the New York Times released a story investigating
the troubling trend of out-of-work subprime mortgage lenders repackaging
themselves as loan modification specialists who promise to lower their clients’
monthly payments and avoid foreclosure—for an up-front fee, of course.
Oftentimes, these loan “specialists” disappear after taking the initial fee of
several thousand dollars, sinking their clients even further into the hole. In
a cruel twist, the people running these loan modification schemes issued the same
kinds of high-cost loans that brought their clients to the point of foreclosure
in the first place.

This story comes on the heels of the release of the FBI’s 2008 Mortgage Fraud Report Year in Review.  The FBI noted an upswing in both the number and types of mortgage fraud in 2008, including phony foreclosure rescue schemes like the one in the Times, and the trend is expected to continue into this year. It’s no surprise, now that the real estate boom is resoundingly over, that opportunistic mortgage fraudsters who once lived high off the subprime market are forced to find new work. The increasing number of people facing foreclosure is fertile ground for individuals looking to commit fraud.
One way to circumvent this problem is to provide more resources to reliable, HUD-certified housing counselors. These agencies can help troubled homeowners find the best possible way to stay in their homes and avoid foreclosure—about 45% of those who completed counseling were able to remain in their homes, which is a much higher number than those who do not complete counseling. Unfortunately, demand for services often exceeds what these counselors can currently provide. Woodstock Institute and Housing Action Illinois recently issued a report detailing the strains on housing counselor capacity and gaps to access to counseling services in the Chicago region. Some of the report’s recommendations include increasing resources for counseling agencies, making sure counselors are well-trained and have access to technical assistance, and increasing outreach to homeowners facing foreclosure.
HUD-certified housing counselors provide the invaluable service of keeping as many families as possible out of foreclosure. We need to ensure they have the resources they need to do their work and keep homeowners away from fraudulent foreclosure counselors and loan modification scams. In addition to strengthening reliable housing counselors, increasing direct assistance to homeowners and improving the loan modification process are vital to avoiding the damaging effects of foreclosure on families and communities.