Rising mortgage delinquencies and foreclosures have created a “target-rich environment” for rescue scam operators, a Federal Trade Commission official told members of a Senate committee looking into scams aimed at the elderly.

Foreclosure scam artists are targeting areas hard hit by the housing downturn with advertisements in local publications, or contacting homeowners listed in public foreclosure filing records, said Peggy Twohig, associate director of the FTC’s Division of Financial Practices.

In some cases, fraudulent foreclosure rescue schemes will attempt to take title to a homeowner’s property, Twohig said. In others, they may charge troubled borrowers thousands of dollars to represent them in negotiations with loan servicers that rarely stop foreclosure.

The most common type of foreclosure rescue scam involves a reconveyance of a property to a third party, often through a quitclaim deed, with the homeowner expecting to get the home back when it’s no longer in danger of being foreclosed on, said Maryland’s Secretary of Labor, Thomas Perez.

The homeowner often believes that they are refinancing their loan, or will be able to repair their credit, get on firm footing and buy back their property as part of a program arranged by the foreclosure consultant, Perez said. The reality, he said, “is that the homeowner relinquishes title, the property is refinanced to strip out substantial equity, and often the third party purchaser, either knowingly or unknowingly, defaults on the refinanced note and the original homeowner is evicted as a tenant.”

Schemes that are designed to wrest a control of a troubled borrower’s home often require the collusion of straw buyers, appraisers, closing agents, and mortgage brokers and lenders, said Catherine Doyle, the chief staff attorney for the Legal Aid Society of Milwaukee Inc.

Testifying this week before the Senate Special Committee on Aging, Doyle gave lawmakers some real-life examples of how mortgage rescue schemes work.

One foreclosure “consultant” talked a terminally ill man and his wife into moving out of their house and into an apartment. After obtaining power of attorney and selling the house, the consultant kept the $32,000 net proceeds as an “intermediary fee” that was not disclosed to the couple, who only learned of the sale when a former neighbor called to tell them somebody was moving into their house.

After the house was sold, the terminally ill man died, “consumed with worry about his wife’s financial future,” Doyle said. His wife did not learn that the consultant had illegally pocketed the fee until two years later, when she was visited by an attorney with the Wisconsin Department of Justice.

In another case, a 65-year-old widower granted power of attorney to a foreclosure “rescuer” who sold her house and divided up the $54,700 in net proceeds to people the victim did not know.

“This ‘disbursement of proceeds’ is reminiscent of a gang of thieves dividing up the loot, leaving nothing” for the victim, Doyle said. “The closing agent, a local title company, issued checks payable to these people, apparently without question.”

Doyle said Wisconsin lawmakers are weighing legislation that would regulate transactions involving real estate in foreclosure that’s patterned after legislation adopted by other states, including Minnesota and Illinois.

Testifying on behalf of the National Association of Realtors, Minneapolis-based real estate broker John Anderson said Minnesota enacted a law governing foreclosure consultants in 2004, which requires all details of a reconveyance transaction to be spelled out in a written contract, including the exact nature of services provided and the total amount and terms of compensation.

Anderson said the most important provision of Minnesota’s law is that it gives homeowners the right to cancel contracts with foreclosure consultants within three days. The law gives victims the right to file civil suits to recover losses, and fraudulent foreclosure consultants also face the threat of criminal prosecution.

Anderson said older homeowners who don’t want to be a burden on family members are particularly vulnerable to foreclosure rescue schemes. He said about 43 million Americans aged 50 and over own homes, with a typical market value of $186,200.

Doyle said 14 states have laws or regulations governing foreclosure consultants and rescue schemes, but that additional federal legislation is needed.

Doyle said federal regulations should put in place a nationwide requirement that foreclosure consultants enter into written contracts that include a three-day right of cancellation, prohibitions on payment of services until the services are performed, and limits on interest and fees charged when consultants make loans to distressed homeowners.

Congress should also prohibit homeowners from granting power of attorney or ownership in a property to foreclosure consultants, she said, and strengthen remedies under the Real Estate Settlement Procedures Act, including a private right of action for violations.

Sen. Herb Kohl, D-Wis., said he is drafting legislation to help homeowners avoid foreclosure rescue scams, especially in states without existing laws or regulations.

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