Foreclosure "rescue" scams : Rooftop Views

Rooftop Views

Foreclosure "rescue" scams

Large parts of the country are just now seeing the large numbers of foreclosures that we in Colorado have experienced for the past two years. As always, it seems where people are in trouble, there are predators out there waiting to pounce.

Convinced that home foreclosures will rise dramatically in the next two years, the chief economist for the Real Estate Center at Texas A&M University warns that a new scam threatens home buyers desperately looking for a way out of financial stress.

"Predatory lenders now offer what they call ‘rescue loans,'" said Dr. Mark Dotzour, "but home buyers are neither rescued nor do they actually receive loans."

Home buyers who purchased homes with subprime loans are especially vulnerable, he said. Predatory lenders are targeting subprime borrowers who have some equity built up in a home but who are having difficulty meeting monthly mortgage payments.

Home buyers with impaired or nonexistent credit histories often turn to subprime loans despite the higher interest that comes with them. According to Dotzour, many are about to discover that their "American dream" has turned into a nightmare.

Here is how the scam works. The home buyer gets behind on mortgage payments. The predatory lender offers a "loan to get caught up" on the delinquent mortgage payments. In exchange for the rescue, the homeowner signs over the title to the predator, who promises that the home buyer may remain in the home while paying rent. The predator then sells the house to someone else, and the original homeowner gets an eviction notice.

About a dozen states have passed laws designed to deter rescue loan fraud, but Texas is not one of them.

"The scam is called a loan, but it is not," says Dotzour. "It really is a buy-out with a leaseback."

Dotzour fears the problem is going to get much worse. As of Oct. 31, some 4% of borrowers who obtained subprime loans in 2006 were 60 days or more behind on payments. He said the delinquency rate is running twice that of a year ago.

"Foreclosures are up 27 percent in the last 12 months," said the noted economist, "but that's still low in my books. I'm betting 2007 U.S. foreclosures will double last year's total."

Subprime mortgage volume has increased fivefold in five years. The Mortgage Bankers Association estimates that $1.1 trillion to $1.3 trillion in subprime loans are due to adjust to higher interest rates in 2007.

Remember that old adage, it if seems too good to be true, it probably is.