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Mortgage desperation draws scams

Companies raising false hopes and charging handsomely have flourished as the crisis has deepened.

If financially distressed homeowners didn't have enough problems to worry about, here's another:

Despite federal efforts to steer them to specially trained, certified, and free housing counselors, some companies are stepping in and charging fees ranging from $300 to $3,000 to arrange loan modifications under the Obama administration's new relief plan.

Or even to do nothing at all. Law enforcement officials say the worst such companies are scams designed to confuse people at a vulnerable time. On Thursday, New Jersey sued two Camden County companies, Hope Now Financial and New Hope Modifications, saying more than 100 homeowners from around the country had paid the companies and gotten nothing for their money.

Officials say such scams are part of a broader problem that has grown since the bubble in housing prices began to deflate in mid-2006, and that has flourished since the recession deepened last fall.

"They've really blossomed in the last six months," Pastor Herrera Jr., director of the Los Angeles County Department of Consumer Affairs, said last week at the national assembly of the Consumer Federation of America.

Herrera said his office had investigated about 1,000 complaints against businesses that bill themselves as "foreclosure consultants" or "loan-modification" companies. He said that not all were complete scams, but that all preyed on people in financial trouble.

The irony, government officials say, is that the victims do not realize they have free access to a nationwide network of free counselors, trained and certified by the federal Department of Housing and Urban Development.

"Unfortunately, we have the perception as consumers that you get what you pay for," Herrera said.

The growth in scams also reflects the sheer size of the problem.

About three in 10 California homeowners with mortgages are "under water," real estate shorthand for owing more than a property is worth. Nationwide, 26 percent of homeowners with first mortgages were in that position in the fourth quarter of 2008, according to Moody's That included 24 percent of such homeowners in Pennsylvania and 18 percent in New Jersey.

Being under water on a loan puts a homeowner at risk in various ways. One is that without extra cash to pay off the loan, the owner cannot sell the property without defaulting. Another is that if something goes wrong with the home, the homeowner cannot borrow more to repair it.

The problem is compounded by exotic subprime mortgages such as so-called "exploding ARMs" - adjustable-interest-rate mortgages that lured borrowers with two-year teaser rates - and by the rising jobless rate, as homeowners lose wages crucial to making house payments.

About 5 percent of the nation's 51.4 million mortgages, or 2.6 million mortgages, were classified as "seriously delinquent" in January, said. But about 28 percent of subprime mortgages, or more than 1 million mortgages, were in that category.

To help address the problem, and limit the secondary damage to the economy caused by the wave of foreclosures, the Obama administration recently announced its Homeowner Affordability and Stability Plan.

There is no question the plan is complicated. To be eligible, a homeowner must be able to show that there was an event that triggered the need for a modification, such as a layoff or a recent or imminent jump in payments, or be at least two months behind on payments.

It is not yet clear how successful the plan will be. A key question is whether loan-servicing companies, which handle payments for the underlying mortgage owners or mortgage pools, will cooperate.

The plan offers them financial incentives to mitigate any reductions they accept in interest rates or principal. To help give homeowners extra leverage in negotiations, Obama and congressional Democrats are pushing for legislation to allow bankruptcy judges to revise first mortgages in bankruptcy cases - authority they already have for mortgages on vacation homes or investment properties.

Bruce Dorpalen, a Philadelphia resident who serves as national director of housing counseling for Acorn Housing, said at least three of the lead servicers, Wells Fargo & Co., Bank of America Corp., and JPMorgan Chase & Co., have said publicly that they plan to participate.

Dorpalen said Acorn Housing had about 200 HUD-certified counselors around the country who were available to help. For a list of counselors, go to cfm.

Dorpalen said the logic of the whole plan was simple: that, for everyone involved, "the cost of foreclosure is higher than the cost of the modification."

Loan Modification

Homeowners can qualify for loan modifications if total monthly housing payment - principal, interest, taxes, insurance, and any homeowners' association or condominium fees - exceeds 31 percent of their gross monthly income.

If that ratio exceeds 38 percent, the mortgage holder must absorb the cost of a reduction to 38 percent.

The target is to reduce the payment to 31 percent of gross income. The government will subsidize half of the cost of cutting the interest rate, to as low as 2 percent, in order to accomplish that.

If the 31 percent goal cannot be reached that way, there are other options, including extending the terms to 40 years.

For information on the program, go to: