New Law Will Help Reduce Mortgage Relief Scams

Rule Outlaws Advance Fees and False Claims, Requires Clear Disclosures.

Homeowners will be protected by a new Federal Trade Commission (FTC) rule that bans providers of mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they decide is acceptable.

“At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said. “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

While the rule makes these practices illegal, homeowners need to be aware that it may not stop these practices entirely. “What it does do is make the advance payments illegal, but that may not be enough to stop some con artists from breaking the new law,” observed Bruce Hahn, President of the American Homeowners Foundation.  “A homeowner can now seek immediate redress because such advance payments are now illegal, but that may not be much help if a con artist has already left town with your money,” he added.

The FTC issued the Mortgage Assistance Relief Services (MARS) Rule to protect distressed homeowners from mortgage relief scams that have sprung up during the mortgage crisis. Bogus operations falsely claim that, for a fee, they will negotiate with the consumer’s mortgage lender or servicer to obtain a loan modification, a short sale, or other relief from foreclosure. Many of these operations pretend to be affiliated with the government and government housing assistance programs. The FTC has brought more than 30 cases against operations like these, and state and federal law enforcement partners have brought hundreds more.

The most significant consumer protection under the FTC’s new rule is the advance fee ban. Under this provision, mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.

The Rule requires mortgage relief companies to disclose key information to consumers to protect them from being misled and to help them make better informed purchasing decisions. In their advertising and in communications directed at individual consumers (such as telemarketing calls), the companies must disclose that:

● they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;

● the lender may not agree to change the consumer’s loan; and

● if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Companies also must explain in their communications to consumers that they can stop doing business with the company at any time, can accept or reject any offer the company obtains from the lender or servicer, and, if they reject the offer, they don’t have to pay the company’s fee. The companies also must disclose the amount of the fee.

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

● the likelihood of consumers getting the results they seek;

● the company’s affiliation with government or private entities;

● the consumer’s payment and other mortgage obligations;

● the company’s refund and cancellation policies;

● whether the company has performed the services it promised;

● whether the company will provide legal representation to consumers;

● the availability or cost of any alternative to for-profit mortgage assistance relief services;

● the amount of money a consumer will save by using their services; or

● the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

The American Homeowners Foundation urges homeowners who need mortgage assistance to contact a local nonprofit mortgage counseling agency in their areas. The services provided by these nonprofits are usually free. You can find one in your area on the Department of Housing and Urban Development’s web site.

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Residential Remodeling Growing

Even as home values continue to drop, homeowners continue to improve their homes.

Yet one more piece of data seems to suggest that homeowners are becoming more optimistic about the future. The Residential BuildFax Remodeling Index, a residential building and permitting database tracking 4,000+ cities and counties throughout the country, rose 18% year-over-year in 2010. After fourteen straight months of increase it reached a peak of 103.8 in December 2010, the highest December number in the history of the index, which started in 2004.

The increase comes at a time when more and more homeowners are underwater, making the financing of remodeling projects more difficult. “We believe that many of these homeowners are drawing on their savings or other forms of consumer credit, such as credit cards to pay for the remodeling,” said Bruce Hahn, President of the American Homeowners Foundation. “Anecdotal evidence that most homeowners are opting for less ambitious projects than in the past supports this view,” he added. Another factor may be barriers to other alternatives. “In many markets it is very difficult to sell your home. Even if you can sell your home, financing its replacement may be a challenge because mortgage lenders have substantially tightened borrower requirements. If moving up isn’t an option, improving your current home may be the next best alternative.”

The West and South both saw better-than-average remodeling activity in December, with the South posting a four-year high, and the West posting an index high. The Midwest suffered its usual significant November-to-December decline, and the Northeast continues to lag all other regions while still showing signs of recovery. The BuildFax Remodeling Index for the Northeast was down 4.1 points (5%) month-over-month but up 1.3 points (2%) year-over-year; the South was down 0.6 points (less than 1%) month-over-month but up 9.1 points (12%) year-over-year; the Midwest was down 11.8 points (11%) month-over-month and down 0.1 points (less than 1%) year-over-year; and the West was up 2.9 points (3%) month-over-month and up 11.3 points (12%) year-over-year.

If a homeowner is lucky enough to have substantial equity in their home and good credit, financing a remodeling project through a new mortgage may make a lot of sense. Mortgage rates are at historic low levels and in many cases a homeowner who can do cash out refinancing will find themselves with new monthly mortgage payments that are lower than they have on their current mortgage. There’s also hope for homeowners with limited equity in their home. Some lenders may be willing to base the allowed mortgage amount on the increased value of the home when the work is complete.

Homeowners need to be careful when selecting remodeling contractors. In good times and bad, complaints about remodeling contractors are near the top of both the Better Business Bureau’s and the American Homeowners Foundation’s complaint list. There are a number of steps you can take to reduce the risk. Your should check the contractor's credentials- carefully.   Are they licensed and insured for workers compensation, property and personal liability?  If in doubt, ask to see their insurance certificate.  Do they belong to the National Association of the Remodeling Industry, the National Association of Home Builders Remodelers Council, and/or any of the more specific trade associations in the remodeling sector?  That's a sign of commitment to the trade and to professionalism.   Most also offer certification and/or management training and keep their members up to date on the latest products and techniques.  Ask for recent references on similar jobs (employee and subcontractor turnover is often fairly high, so recent jobs are a reliable indicator of their current capability).  Check their record with the Better Business Bureau while you're at it.

For all but the most minor jobs it is especially important to utilize a comprehensive written contract.  This will greatly reduce the likelihood of disputes with your remodeler.  Most disputes arise over issues that were not decided in advance.  Make sure it covers the description of the project, timetable, payment schedule, etc., with general provisions defining the responsibility of the contractor and the subcontractors, defects and correction, change order procedures, warranties, right to termination, and alternative dispute settlement mechanisms (since more than half of the costs of lawsuits represent legal fees, homeowners and contractors will almost always be better off with mediation, conciliation, and/or binding arbitration clauses should a disagreement arise). The American Homeowners Foundation has an inexpensive fill in the blank remodeling contract available through our website, and a real estate attorney can also customize one for you from scratch.

Foreclosure Rescue Programs at Risk

Congress begins effort to terminate housing rescue programs.

Financial Services Committee Chairman Spencer Bachus announced on February 24 that there will be a subcommittee hearing and full committee markup of four bills that will terminate what he considers “failed and ineffective housing foreclosure programs”. The four proposals – which terminate the troubled Home Affordable Modification Program (HAMP), the Neighborhood Stabilization Program, the FHA Refinance Program, and the Emergency Homeowner Relief Fund – will be the subjects of a hearing on March 2 by the Insurance, Housing and Community Opportunity Subcommittee and a full committee markup on March 3.

“In an era of record-breaking deficits, it’s time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners,” said Chairman Bachus.  “These programs may have been well-intentioned but they’re not working and, in reality, are making things worse.” Insurance and Housing Subcommittee Chairman Judy Biggert added:  “We need to break down barriers that have delayed the housing recovery, including expensive and ineffective government programs that have failed to help homeowners.  Unfortunately, these programs were set up in haste, executed poorly, and have done little to restore stability in the marketplace.  A government program that spends more to save a single borrower than it costs to buy a home is no help at all – it’s just a waste of taxpayer money.  We need to stop funding programs that don’t work with money we don’t have.”

The Committee will consider the following bills:

The HAMP Termination Act.  The Obama Administration’s signature anti-foreclosure effort, the Home Affordable Modification Program (HAMP), has failed to help a sufficient number of distressed homeowners to justify the program’s cost.  According to the Administration, HAMP was supposed to help 4 million homeowners. Instead, only 521,630 loans have been permanently modified under this program and the re-default rate is high. To date, the Administration has spent approximately $840 million of the $29 billion earmarked for HAMP from the Troubled Asset Relief Program (TARP).

Far from helping at-risk homeowners, HAMP has actually made many worse off, according to a report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP): 

People who apply for modifications via HAMP sometimes “end up unnecessarily depleting their dwindling savings in an ultimately futile effort to obtain the sustainable relief promised by the program guidelines.  Others, who may have somehow found ways to continue to make their mortgage payments, have been drawn into failed trial modifications that have left them with more principal outstanding on their loans, less home equity (or a position further ‘underwater’), and worse credit scores.  Perhaps worst of all, even in circumstances where they never missed a payment, they may face back payments, penalties, and even late fees that suddenly become due on their ‘modified’ mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent.  While it may be true that many homeowners may benefit from temporarily reduced payments even though the modification ultimately fails, Treasury’s claim that ‘every single person’ who participates in HAMP gets ‘a significant benefit’ is either hopelessly out of touch…or a cynical attempt to define failure as success.”

The HAMP Termination Act ends the Treasury Secretary’s authority to provide new assistance under the program but preserves assistance already offered to homeowners through HAMP prior to the bill’s enactment.

The Neighborhood Stabilization Program Termination Act.  Congress has appropriated $7 billion for the Neighborhood Stabilization program, including $2 billion in the Obama Administration’s stimulus plan.  Two rounds of NSP funding have already been provided to states and localities.  The Neighborhood Stabilization Program Termination Act ends the program and rescinds the unobligated third round of funding of $1 billion.

Critics have argued that the NSP does not benefit at-risk homeowners facing foreclosure, and may instead create perverse incentives for banks and other lenders to foreclose on troubled borrowers – arguably worsening the housing crisis. 

The FHA Refinance Program Termination Act terminates the program and rescinds unobligated funding.   The price tag for this program is $8.12 billion, of which only $50 million has been disbursed thus far. For this large outlay, the taxpayers have seen minimal return on their investment.  As of December 13, 2010, only 35 applications had been submitted for this program.

The Emergency Mortgage Relief Program Termination Act ends the program and rescinds unobligated funding.  The Dodd-Frank Act reauthorized the long-expired Emergency Homeowners’ Relief Act of 1975 and provided $1 billion to authorize HUD to make emergency mortgage relief payments to homeowners facing foreclosure for up to 12 months, with a possible extension of another 12 months.  These loans will serve to increase the amount of the borrower’s indebtedness, so a borrower who is unable to pay back either the original amount of principal or the additional loans made under the program will be worse off in the long run.

Both former Financial Services Committee Chairman Barney Frank and the Administration took issue with Chairman Bachus’s conclusions. Mr. Frank noted that “The Emergency Homeowner Relief Fund provides assistance to people who are unable to pay their mortgages not because they were imprudent or irresponsible but because they are unemployed.  The program is modeled after a successful one in Pennsylvania and it is the single most effective anti-foreclosure program that has been put forward.  It is substantially similar to a program that had been successfully implemented in seventeen states and the District of Columbia and that was successfully hailed by the Republican governor of Alabama.  I find it therefore particularly troubling that Chairman Bachus is proposing to strike the additional $1 billion to allow other states to participate in the same program from which Alabama benefits.”

“The attack on the Neighborhood Stabilization Program is an attack on cities.  This program provides important funding to cities that have already been hit by the foreclosure crisis and allows them to cope with the blight, expense and destabilization that come with the presence of large numbers of empty properties.  The Neighborhood Stabilization Program allows cities to deal with this problem in a way that reduces municipal costs.” 

The Administration also disagreed with Chairman Bachus’s conclusions. In written testimony Chief of Homeownership Preservation Office Phyllis Caldwell noted that “it is important to remember where the housing market stood just over two years ago.  When the Obama Administration took office in January 2009, the economic crisis had developed into the most serious housing crisis since the Great Depression.  Home prices had fallen for 30 straight months.  Home values had fallen by nearly one-third and were expected to fall by another five percent by the end of 2009.  Stresses in the financial system had reduced the supply of mortgage credit, limiting the ability of Americans to buy homes.  Fannie Mae and Freddie Mac had been in conservatorship for over four months.  And millions of American families faced increasing difficulties in making their monthly mortgage payments – having lost jobs or income – and were unable to sell, refinance, or find meaningful modification assistance.”

In addition there have been some key challenges that had to be addressed.  First, the industry did not have the capacity to effectively respond to the complexity of the foreclosure crisis.  Mortgage servicers were ill-equipped to provide meaningful assistance to homeowners while maintaining their responsibility to investors and still struggle to balance the two.  Second, effective outreach to homeowners is difficult due to the complexity of the challenges they face, and their understandable mistrust of servicers.  Homeowners often are not aware of the free resources available to them, and servicers all must increase efforts to reach them.  Third, homeowners need safeguards.  We have learned that the foreclosure process has to pause long enough to allow homeowners enough time to find help and work out a solution.  Fourth, modifications need to be affordable to work.  In order to modify loans effectively – and sustainably – servicers must focus first and foremost on reducing monthly mortgage payments.  And lastly, because the foreclosure crisis is complex, we had to remain flexible as we looked for solutions that could reach the maximum number of struggling homeowners.”

The American Homeowners Grassroots Alliance believes that both Mr. Frank’s and Chief Caldwell’s points are well taken. The Administration and Congress did the best they could to address a critical problem on a short timeline, and it is unrealistic to expect that everything they tried would be a home run. While all of us would wished these programs had been able to help more homeowners, you can’t evaluate their contribution solely on a cost-per-permanent-success basis. These programs have almost certainly helped blunt the decline of home values. Without them home values today would be less, and even with these programs values in many areas continue to decline. If home values would have been 5% lower without these programs, millions of additional homeowners would be underwater today.

The solution is not to cancel them, but to improve them. There are already signs that we may face another dip in home values, and the total elimination of programs that may prevent that dip from becoming a rout are not prudent. The federal deficit is a serious challenge to be sure, and funding for these programs may have to be cut back. They can continue to help, even if they are cut back, as long as Congress takes a thoughtful approach and addresses their shortcomings with a scalpel rather than a sledgehammer.

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Administration Seeks Mortgage Deal

A settlement could result in reductions of billions in mortgage loan principals.

The Administration is seeking an agreement with lenders and other stakeholders that is intended to reduce the continuing number of foreclosures. Many believe that many of those foreclosures are counter to the best interest of lenders because they aggravate the decline in home values, and the equity in those homes is also the lender’s security. Most mortgage loan modifications to date have focused on reducing monthly payments by temporarily lowering interest rates and/or extending mortgage durations.

Many of those modifications fail. In some cases the homeowner’s financial picture deteriorated further, and they found themselves unable even to keep up with the reduced monthly payments. However, another serious problem is the growth of “strategic defaults.” Many of those homeowners may be able to keep up with the modified mortgage, but they reach the sobering conclusion that the amount of the refinanced mortgage exceeds the market value of their home by tens of thousands of dollars. It might take decades of appreciation at normal rates (about 3% a year) before they break even. In the meantime they could rent a similar home for far less than their monthly mortgage. Increasingly they are doing just that, and sending the house keys back to the lender. Their credit will be badly damaged for 5-7 years if they do so, but from a financial standpoint it may be the wisest decision.

The Administration believes that the growth of strategic defaults can be reduced if lenders would reduce the mortgage principal instead of modifying the terms. Homeowners would have far less incentive to implement strategic defaults. Lenders would be better off because they would avoid the costs associated with a foreclosed property. The data on strategic defaults suggests they are far more likely when a homeowner is deeply underwater, but lenders don’t agree with the data. Lenders, as well as Fannie Mae and Freddie Mac, have also been reluctant to provide principal reductions, because they fear that many borrowers who can afford their loans will then expect similar treatment. They also point out that only a portion of the problem mortgages can be addressed by mortgage reductions, because many distressed homeowners can’t even afford market value based mortgage payments. On that point the lenders are correct, but any reduction in foreclosures will help stabilize the housing market, and that would benefit home owners and lenders alike.

The American Homeowners Grassroots Alliance believes that this initiative is long overdue and will be good for the economy and homeowners if properly implemented. Economists who have warned that foreclosures need to proceed for the housing market to continue on a path to recovery are right in cases where the homeowner no longer has the wherewithal to support a mortgage based on their home’s current market value. In many cases the decline in home values in recent years has been relatively commensurate with the decline in its owners’ income. The current owners can no longer keep up with the payments on their original mortgage but they could support a mortgage that is based on the home’s current market value.

In the latter case it would be a smart economic decision for the lender to simply forgive the difference as well as most or all of the additional costs of a foreclosure if necessary. A foreclosure entails hefty legal fees, and costs of reselling the foreclosed home that could total 10% of the proceeds. During the legal proceedings and substantial time the home would likely be on the market, the foreclosed home will produce no revenue. Avoiding a foreclosure would also avoid driving neighborhood home values down further, which hurts both lenders and other homeowners in the neighborhood. Declining home values also increase strategic defaults, which are much more likely when homeowners are deeply underwater.

Many lenders have failed to reduce mortgage balances in cases where it would make sense for their stockholders, help stabilize home values, and save many homeowners much pain and anguish. Reasons vary, and include a state of denial, inertia, and failure to ramp up the staffing needed to evaluate problem loans on a case-by-case basis. A system that rewards loan servicers more for foreclosures than for preserving the lenders’ equity is also contributing to the problem.  Concerns that many borrowers who can afford their loans will stop paying in the hope of being rewarded with a smaller loan are overblown. No one is asking lenders to give in to such borrowers. If lenders are properly staffed they will be equally able to determine which nonpaying homeowners can afford their current mortgage, which homeowners cannot be helped because they cannot even afford to keep up with a mortgage based on current market values, and which homeowners have a high likelihood of resuming the support of a mortgage based on the home’s current value. Foreclosure is the answer in the first two cases, and it will quickly snuff out any trend of financially capable homeowners trying to weasel out of their mortgage obligations. Reducing mortgage balances is the right answer in the latter case. It will help stabilize the housing market and benefit the economy as well as helping all homeowners, many of whom are also the financial institutions’ stockholders.

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