Loan Modification Scams On the Rise

Dennis Norman

According to data from NeighborWorks America, a national nonprofit organization created by Congress to provide community-based revitalization efforts, every 13 seconds in America, there is another foreclosure filing. This means there are more than 6,600 home foreclosure filings per day and currently, more than 4.5 million households are at risk of foreclosure. Unfortunately there is no end in site as industry experts are predicting 1.5 – 2.0 million new foreclosures in 2010 and as many as a total of 8.1 million by 2012.

This many people in financial distress provides great opportunity for loan modification scam artists, who prey on unsuspecting homeowners with unethical and sometimes unlawful tactics to scam them out of money and often times their homes according to the report. Many of these homeowners have turned to loan modification or foreclosure “rescue” companies for help — only to realize they’ve been scammed. Loan modification scams are proliferating at a rapid pace.

To combat these scam artists and try to protect and educate consumers, NeighborWorks America has launched a “Loan Modification Scam Alert” campaign. Their scam alert website has many resources available to help consumers protect themselves and I would suggest that consumers that are facing falling behind on their mortgages, facing foreclosure or with other housing-related financial issues, check out the site.

The scam alert identifies the following as the most common loan modification scams :

  • Phony Counseling or Foreclosure Rescue Scams
    • The scam artist poses as a counselor and tells you he can negotiate a deal with your lender to save your house—if you pay him a fee first. He may even tell you not to contact your lender, lawyer or housing counselor—that he’ll handle all details. He may even insist that you make all mortgage payments directly to him while he negotiates with the lender. Once you pay the fee, or a few mortgage payments, the scammer disappears with your money.
  • Fake “Government” Modification Programs
    • Some scammers may claim to be affiliated with, or approved by, the government, or they may ask you to pay high, up-front fees to qualify for government mortgage modification programs. The scammer’s company name and Web site may sound like a real government agency. You may also see terms like “federal,” “TARP” or other words related to official U.S. government programs.
    • Your lender will be able to tell you if you qualify for any government programs to prevent foreclosure. And you do not have to pay to benefit from these programs.
  • Bait-and-Switch
    • The scam artist convinces you to sign documents for a “new loan modification” that will make your existing mortgage current. This is a trick. You actually just signed documents that surrender the title of your house to the scam artist in exchange for a “rescue” loan.
  • Rent-to-Own or Leaseback Scheme
    • A scammer urges you to surrender the title of your home as part of a deal that will let you stay in your home as a renter and then buy it back in a few years. He may tell you that surrendering the title will permit a borrower with a better credit rating to get new financing—and keep you from losing your home. However, the scammer may have no intention of ever selling the home back to you.
    • But the terms of these deals usually make buying back your home impossible. Worse yet, when the new borrower defaults on the loan, you’re evicted.
    • Variations:
      • The scammer raises your rent over time to the point that you can’t afford it. After missing several rent payments, you are evicted, leaving the “rescuer” free to sell your house.
      • The scammer offers to find a buyer for your home, but only if you sign over the deed and move out. The scammer promises to pay you some of the profit when the home sells. But the scammer simply rents out your home and keeps the profits while your lender proceeds with the foreclosure. You lose your home and are still responsible for the unpaid mortgage, because transferring the deed does not affect your mortgage obligation.
  • Bankruptcy to Avoid Foreclosure
    • The scammer may promise to negotiate with your lender or get refinancing on your behalf if you pay a fee up front. Instead of contacting your lender or refinancing your loan, he pockets the fee and files a bankruptcy case in your name—sometimes without your knowledge.
    • A bankruptcy filing often stops a home foreclosure, but only temporarily. Filing bankruptcy stops any collection and foreclosure while the bankruptcy court administers the case. But, eventually you must start paying your mortgage, or the lender will be able to foreclose.
    • You could lose the money you paid to the scammer and your home. Worse yet, a bankruptcy stays on your credit report for 10 years, which makes it difficult to obtain credit, buy a home, get life insurance or even get a job.

In addition to visiting the Loan Modification Scam Alert website, one of the best things you can do to protect yourself is to educate yourself about programs such as HAMP (the Home Affordable Modification Program) for loan modifications as well as HAFA (The Home Affordable Foreclosure Alternatives program) so that you understand how the programs actually operate and see that you don’t need to necessarily pay someone for assistance.

I’ve written many articles on both the HAMP as well as HAFA program with complete information on the programs as well as links to information on the programs. To access these articles easily, simply click on the links below:

HAMP Articles (Home Affordable Modiciation Program)

HAFA (Home Affordable Foreclosure Alternatives Program)


Fannie Mae Issues Guidelines For HAFA Short-Sales and Deed-in-Lieu

UPDATE- June 2, 2010: The National Association of REALTORS obtained answers from the Treasury Department on 3 common questions about HAFA:

  1. agents are not permitted to rebate a portion of their commission to the buyer,
  2. sellers who are real estate agents must list their home for sale with another broker, not their own broker, and
  3. the incentive allowed for subordinate lien holders (6% of any one subordinate lien, up to a total of $6,000 for all subordinate liens) is a hard cap and may not be supplemented from any source.

Dennis Norman

In March I did an update on the Home Affordable Foreclosures Alternative (HAFA) Program which was scheduled to go into effect April 5, 2010.  Today, Fannie Mae issued guidelines to their servicers outlining the policies and produres Fannie Mae had adopted as a result of HAFA.

What is HAFA?  In a nutshell it gives qualifying homeowners the opportunity to do a short-sale or deed-in-lieu rather than face foreclosure:

The Home Affordable Foreclosure Alternatives Program provides financial incentives to loan servicers as well as borrowers who do a short-sale or a deed-in-lieu to avoid foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives help the lender out by avoiding the potentially lengthy and expensive foreclosure proceedings and also by protecting the property by minimizing the time it is vacant and subject to vandalism and deterioration. These options help out the borrower by avoiding the foreclosure process and the uncertainty that comes with it and allows the borrower to negotiate when they will give up possession of their home as well as, under the HAFA program be released from any further liability from the loan including short-fall and deficiencies.

Highlights of the guidelines given to mortgage servicers by Fannie-Mae:

  • Servicers are “encouraged to adapt their processes to implement these Fannie Mae HAFA policies and procedures immediately;” however, they have until August 1, 2010 to implement them.
  • The HAFA  Short-Sale and HAFA DIL (deed-in-lieu) program will be offered to borrowers through December 31, 2012

Borrower Eligibility for HAFA Consideration:

  • A borrower cannot be considered for HAFA until the borrower has been evaluated for a HAMP modification (including, but not limited to, providing all required income documentation).
  • Once a borrower has met all of the eligibility criteria for HAMP, the borrower must be considered for a HAFA short sale or DIL (after all home retention options have been considered) if the borrower:
    • was not offered a trial modification due to inability to meet the HAMP qualifications (for example, did not pass the net present value (NPV) evaluation or meet the target monthly mortgage payment ratio based on verified income);
    • failed to complete the trial period successfully;
    • became two consecutive payments (31 or more days) delinquent on the modified mortgage loan; or
    • requests a short sale or DIL.
  • Lender’s are not allowed to consider a borrower for a Fannie Mae HAFA short sale or DIL (without consent from Fannie Mae) if:
    • a foreclosure sale is scheduled to be held within 60 days of the borrower’s request for a Fannie Mae HAFA short sale or DIL, ordetermination that a borrower is ineligible for HAMP, or;
    • a foreclosure proceeding could be initiated and reasonably be expected to result in a foreclosure sale being held within 60 days of the borrower’s request for a Fannie Mae HAFA short sale or DIL or determination that a borrower is ineligible for HAMP; or;
    • the mortgage loan is secured by a property in Florida on which foreclosure proceedings are pending, judgment has been obtained, or a hearing on summary judgment or trial is scheduled within 60 days.

Financial Requirements of Borrower for HAFA:

The lender, prior to deciding if the borrower is eligible for HAFA, must determine if the borrower has:

  • the ability to continue making the mortgage payments but chooses not to do so; or
  • substantial unencumbered assets or significant cash reserves equal to or exceeding three times the borrower’s total monthly mortgage payment (including tax and insurance payments) or $5,000, whichever is greater; or
  • high surplus income.

So the bottom line here is, if you have a bunch of assets, money in the bank or high income relative to you debt, Fannie Mae is not going to be interested in letting you walk away from your deficiency after a short-sale, or DIL.

On question that has come up on other posts I’ve written about this, is the effect of bankruptcy on eligibility for HAFA….Here’s the answer from Fannie Mae:

  • A borrower in an active Chapter 7 or Chapter 13 bankruptcy case must be considered for a Fannie Mae HAFA short sale or DIL if the borrower, borrower’s counsel, or bankruptcy trustee submits a request to the servicer. However, the servicer is not required to solicit borrowers in active bankruptcy cases for shorts sales or DILs. With the borrower’s permission, a bankruptcy trustee may contact the servicer to request a short sale or DIL. The servicer and its counsel must work with the borrower or borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures. The servicer must extend the required time frames outlined in this Announcement as necessary to accommodate delays in obtaining bankruptcy court approvals or receiving any periodic payment when made to a bankruptcy trustee.

Lenders must, upon determination of eligibility for a HAFA Short-Sale or DIL, determine the fair market value of the property:

  • As soon as a borrower is determined to be eligible for a Fannie Mae HAFA short sale or DIL and has demonstrated a willingness to participate, the servicer must take the necessary steps to determine the market value of the mortgaged property. Fannie Mae will require a broker price opinion (BPO) based on an interior and exterior inspection of the property or, if licensing requirements in the state dictate use of an appraisal for these purposes, an appraisal
  • The BPO (or appraisal, if required) must be dated within 90 calendar days of the date the relevant HAFA Agreement is executed by the servicer.

Allowable Fees on Short-Sale:

Fannie-Mae will allow:

  • real estate sales commission customary for the market. The servicer may not require that the commission be reduced to less than 6 percent of the sales price of the property;
  • real estate taxes and other assessments prorated to the date of closing;
  • local and state transfer taxes and stamps;
  • title and settlement charges typically paid by the seller;
  • seller’s attorney fees for settlement services typically provided by a title or escrow company;wood-destroying pest inspections and treatment, when required by local law or custom;
  • homeowners’ or condominium association fees that are past due, if applicable.
  • Fees paid to a third party to negotiate a short sale with the servicer (commonly referred to as “short sale negotiation fees” or “short sale processing fees”) must NOT be deducted from the sales proceeds or charged to the borrower.
    • Additionally, the Servicer, its agents, or any outsourcing firm it employs must not charge (either directly or indirectly) any outsourcing fee, short sale negotiation fee, or similar fee in connection with any Fannie Mae loan.

In addition, Fannie Mae will allow;

  • The Lessor of 6% of the balance of a junior lien, or $6,000, to settle the second lien.
  • $3,000 to the Seller, to be paid out of sale proceeds, to help defray the costs of relocation.

Short-Sale Approval Should be Faster:

One of the major hindrances to short-sales has been the amount of time it takes for a lender or servicer to respond to an offer to purchaser, many times taking several months.  Under these new guidelines that should not be a problem because, provided the Seller’s Agent has submitted all the required document to Fannie Mae (they only have 3 business days to submit) then the servicer must respond to the offer within 10 business days indicating acceptance or rejection of the offer. This is huge and should really help facilitate short-sales.

Deed-in-Lieu Eligibility:

Generally, for a borrower to be eligible for a Fannie Mae HAFA DIL, the mortgaged property must have been listed for sale at market value for 120 days or more. A servicer may waive the requirement that the property securing the mortgage loan previously be listed for sale in cases involving:

  • a serious illness or disability,
  • a deceased borrower or co-borrower,
  • a borrower or co-borrower who has been relocated or who has been deployed by the military,
  • a determination that local market conditions would impede a sale of the property,
  • a borrower who demonstrates an unwillingness or inability to maintain or market the property during the listing period, or
  • a borrower who has expressed an interest in doing a Deed for Lease

This is simply an overview of the Fannie-Mae guidelines and the HAFA program…there is much more, but this gives you the idea.  For starters, this is nothing that  a homeowner would want to take on alone in my opinion.  I think you need a qualified real estate broker or agent, that has in-depth knowledge about HAMP and HAFA and the short-sale process.

To get more information I suggest your read my post from March, you can access that by clicking here, or if you really want to have some fun, you can read the complete Fannie-Mae guidelines by clicking here.


Help for homeowners facing foreclosure or are underwater

Dennis Norman

Back in early December I did a post about a new program that was announced in November, the Home Affordable Foreclosures Alternative (HAFA) Program which is scheduled to go into effect April 5, 2010. There was recently supplemental documentation published as well as FAQ’s about the program and I have to admit, it seems to me the government is getting it right with this program.


The Home Affordable Foreclosure Alternatives Program provides financial incentives to loan servicers as well as borrowers who do a short-sale or a deed-in-lieu to avoid foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives help the lender out by avoiding the potentially lengthy and expensive foreclosure proceedings and also by protecting the property by minimizing the time it is vacant and subject to vandalism and deterioration. These options help out the borrower by avoiding the foreclosure process and the uncertainty that comes with it and allows the borrower to negotiate when they will give up possession of their home as well as, under the HAFA program be released from any further liability from the loan including short-fall and deficiencies.

How will the short sale process work under HAFA?

  • You will need to enter into a short-sale/deed in lieu agreement iwth your lender.
  • Before listing your home for sale your lender will approve a list price on your home or give you the amount of sale proceeds that are acceptable to them under a short sale. The lender will also let you know what costs may be deducted from the sale proceeds, such as commission and closing costs.
  • After you list your home and receive an offer from a buyer, you will submit the offer, along with a “Request to Approve a Short Sale form, to your lender. In addition, you will need to submit proof that the buyer has funds to purchase your home, such as a letter that the buyer is approved for a mortgage. After you provide the necessary documentation to your lender, your lender has 10 business days to approve the sale.
  • At the closing of the sale the lender is to release you from ALL responsiblities for repaying your mortgage. Plus, you will receive $3,000 from the proceeds to help pay some of your moving expenses.

Your responsibilities under the HAFA short sale.

  • Keep your house and your property in good condition and repair and cooperate with your broker to show it to potential buyers.
  • You may be required to continue to make full or partial mortgage payments (this will be determined by your lender)
  • You must be able to provide the buyer of your home with clear title. To start, determine if you have other loans, judgments or liens secured by your home, such as a home-equity line of credit or a second mortgage. If there are such liens, you will need to either pay these loans off in full or negotiate with the lien holders to release them before the closing date. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment. You can get help from your broker to negotiate with the other lien holders.
  • The program allows up to 6% of the unpaid principal balance of each loan (not to exceed an aggregate of $6,000 for all the loans in total) to be paid from the sale proceeds to help get a lien release.
  • At several stages of the short sale process, such as after an offer is received, you will need to complete some paperwork. You are responsible for returning all documents within the time allowed in your short sale agreement with your lender.

Additional Info on Short-Sales.

  • You cannot list the property with, or sell it to anyone that you are related to or have a close personal or business relationship with, it must be an “arms length transaction”.
  • If you have a real estate license, you cannot earn a commission by listing your owner property. Nor can you have an agreement to receive a portion of the commission.
  • The buyer of your home must agree not to sell the home within 90 calendar days of the date it is sold by you.
  • You must not have any expectation that you will be able to buy or rent (it’s your lenders discretion on the rent) your house back after closing.

HAFA Short-Sale FAQ’s

  • How much real estate commission can be paid out of the sale proceeds? Six Percent is the maximum commission and the seller, nor buyer, can receive any portion of the commission.
  • Can a lender that has a second mortgage or other junior lien request additional payments from the seller or real estate agent in addition to what they are allowed to receive from sale proceeds? No.
  • What if the property was a principal residence but is vacant at the time the lender evaluates the deal for a Short-Sale or Deed-In-Lieu? The property can be vacant for up to 90 days prior to the date of the Short Sale Agreement and still be eligible but only if the borrower can provide documentation showing that the borrower was required to relocate at least 100 miles from the mortgaged property to accept new employment or was transferred by the current employer, and there is no evidence indicating the purchaser has purchased a new home 90 days prior to the agreement.

Deed in lieu option.

If by the termination date of your short-sale agreement with your lender you have not been able to sell your home, but you have complied with all of your responsibilities under the agreement, then you will be given the opportunity to convey (transfer) ownership of your home to the lender. While this will not allow you to keep your home it will prevent you from going through a foreclosure and will release you from all responsibility to repay the mortgage debt. Additionally, you will still be eligible to receive $3,000 to help with your moving expenses.

Additionally, if you are unable to afford your first mortgage (and therefore not able to do a short sale) you will be considered for the deed-in-lieu option.

Home Affordable Foreclosure Alternatives Program (HAFA) Launched

Dennis Norman

Dennis Norman

Last week the Treasury Department announced the Home Affordable Foreclosure Alternatives Program (HAFA), the latest program under the Home Affordable Modification Program (HAMP), designed to offer alternatives to homeowners facing foreclosure.


The Home Affordable Foreclosure Alternatives Program provides financial incentives to loan servicers as well as borrowers who do a short-sale or a deed-in-lieu to avoid foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives help the lender out by avoiding the Continue reading “Home Affordable Foreclosure Alternatives Program (HAFA) Launched