By Renae Merle
Washington Post Staff Writer
Friday, December 26, 2008
A growing industry has emerged to take advantage of the unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits.
Such companies charge $500 to $2,500 or more and are drawing the ire of consumer advocates, regulators and lenders, who say many are just the latest version of foreclosure rescue scams and can make it more difficult for homeowners to get help.
"You don't need to go out and hire someone to help you," said Michael Gross, managing director of mortgage servicing for Bank of America. "It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free."
Loan modification firms say they are taking up the slack left by unresponsive lenders and overwhelmed nonprofit groups. "Nonprofits are not as efficient as the regular market," said Moose M. Scheib, the head of Michigan-based LoanMod.com, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. "I think the difference is probably more attention you get from us."
There do not appear to be federal laws that prohibit charging for this service, several law-enforcement officials and law professors said. Instead the practice is governed by a hodgepodge of state and local laws. Virginia does not appear to restrict its practice, according to the state's consumer services department. Officials with the District's Department of Insurance, Securities and Banking said these companies would fall under statutes covering credit counseling services, and therefore must be registered.
Maryland has received several complaints and issued an alert in September warning that under its existing laws, loan modification firms cannot charge an upfront fee.
Maryland's Department of Labor, Licensing and Regulation has helped recover at least $10,000 for homeowners who say they were misled, according to the agency. But the state says the problem is bigger than the fees.
"Once a borrower pays an unscrupulous loss-mitigation consultant and time is wasted, the damage has been done," said Sarah Bloom Raskin, Maryland's commissioner of financial regulation. "While we may be able to recover fees, we can never recover the lost time -- time that the borrower could have used to work out a bona fide loan modification."
"We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people," said Laurie Maggiano, senior policy adviser at HUD's Office of Housing. The department has certified 2,300 nonprofit housing counseling agencies across the country, which are required have at least one year of experience administering a housing counseling program, Maggiano said.
Legal Services of Northern Virginia, a nonprofit group, investigated a case involving U.S. Homeowners Assistance of Irvine, Calif., after a client paid the firm $2,500 for help modifying the loan for her Alexandria home. After receiving the money, the company did not return her calls, said Kristi Cahoon, a lawyer with the nonprofit group.
By the time the homeowner, a 75-year-old retired nurse, realized no help was forthcoming, she had fallen behind in her payments and was facing foreclosure, Cahoon said.
U.S. Homeowners Assistance said in an e-mailed statement that the borrower's money could be returned if she requested a refund and a review of her file was conducted.
Clayton Sampson, founder of U.S. Housing Assist of Nevada, which launched in July, said nonprofits provide a great service, but added, "We have a lot of clients that need us."
Sampson said he spent five years at a mortgage brokerage and his contacts have enabled him to customize workout plans for a homeowner's lender. His firm charges a minimum of $2,500, but he said he would return the money if he was unable to help the homeowner.
The pitch companies make varies. But one approach includes paying a company to challenge the legality of a loan -- a process housing experts say can be long and complicated.
Vienna-based Mortgage Analysis and Consulting, for example, charges $150 for a consultation and $250 to $500 for a preliminary audit. If the audit finds problems with the loan document, Mortgage Analysis will refer the borrower to a lawyer, who may charge an additional $2,000 retainer. If the lawyer requests a more in-depth audit, Mortgage Analysis charges up to $1,750, which clients can pay in installments.
In several cases, the introduction of a lawyer has helped spur the lender to agree to a better loan modification, said Jose Semidey, the firm's founder.
Semidey, a former real estate broker, said he planned to open a nonprofit firm earlier this year to help homeowners. But, he said, he quickly found himself inundated with distressed homeowners willing to pay for his service.
"I am not in this for the money or to get rich. I see it as a mission and a duty," he said. "And yes, we are a for-profit company, but that only makes [us] do a better job."
Virginia's State Bar is investigating a complaint that Semidey has illegally practiced law. Semidey said he makes clear he is not a lawyer and refers clients to a list of lawyers he has compiled.
One of Semidey's former clients, Edwin Monge, said he became concerned that he would no longer be able to afford the payments on his Woodbridge townhouse after the adjustable interest rate rose and the payments increased. The home's value had tumbled, making it impossible for him to refinance. Monge said he met Semidey through a friend and eventually paid him $7,000, some of which was to be used to pay a lawyer.
"I was blind," Monge said. "I wasted my money, and they lied to me and they didn't tell about the community groups."
Some of the money eventually was returned. And in the end, with the help of a nonprofit legal group, Monge was able to get into a new loan -- at no cost -- through a Federal Housing Administration program.
Semidey said the process did not work out because Monge could not find a local lawyer to represent him and a large portion of the money was spent on an outside auditor. "He came to our office 10 or 15 times," he said. "We translated for him. We sat with him. . . . You cannot make everyone happy."
He said, "We did not profit from the interaction."