Why Scam Artists Thrive In the Loan Modification Process

While most borrowers can navigate the process of getting their mortgage modified by themselves, there are others who need an assist here or there. And some may want to delegate the entire responsibility. Here are the steps and where representation firms fit in:

-- Negotiating the deal: Firms hustling for modification business sometimes pretend that they have the knowledge and skills to negotiate a favorable deal with the loan servicer. In fact, a modification is not negotiated -- it is granted (or denied) by the servicer, applying rules or principles set out by the investors who own the loans. In the case of modifications under the federal government's Making Home Affordable program, the rules are set by the government, but these do not override investor rules. If the documents governing a particular loan -- known as the Pooling and Servicing Agreement -- prohibit a particular modification, the program will not help.

-- Delivering information to the servicer: Legitimate firms in the modification business know the information that each servicer wants and where to deliver it. This is their main stock in trade. But that information is also available to borrowers. I have compiled it on my Web site, at http://www.mtgprofessor.com; click on Mortgage Servicer Information Requirements.

-- Assuring the accuracy of information: Filling out the servicer's questionnaire correctly is a challenge to some borrowers, but free help is readily available. One of the purposes of Hope Now, the alliance of servicers, investors and counseling agencies established last year to help borrowers in trouble, was to provide free counseling. Borrowers can call 888-995-HOPE, or they can find a Department of Housing and Urban Development counselor in their state by going to http://www.hud.gov/local/index.cfm.

-- Follow-up: Mistakes happen in modifying loans because the process is complex, and employees of the servicer may be overworked or undertrained. Either the borrower or the borrower's designee should follow up the request for modification to make sure the papers haven't been lost and the case is in an active queue. If the request has been rejected on the grounds that the borrower is not eligible, the borrower or the borrower's representative should find out why and attempt to confirm that the reason is legitimate.

Many, if not most, borrowers can do it all themselves, perhaps with some assistance from free counselors. But some borrowers are clueless -- they need to be represented, not just counseled. They want someone to take over the process for them and follow it to a conclusion.

The function of counselors is to counsel, not to act as the borrower's agent in dealing with the servicer. Some may do that, but it is not a counseling function.

Because there is a demand for representation services, as distinguished from counseling, an industry has arisen to meet it. For a fee, these modification specialists claim to represent borrowers in dealing with servicers. Costs vary, but $3,500 is not unusual. Some of them may perform a decent -- if overpriced -- service, but many are scamsters who collect fees and do little else. There is no way for borrowers to tell the difference.

The response of the federal government to the modification scams is to preach that borrowers should not pay anyone to help them because counseling is available free, and to crack down on deceptive practices by the modification assistance firms. In one week recently, the Federal Trade Commission filed enforcement actions against five firms it claims use deceptive marketing tactics, and sent warning letters to 71 others.

This is fine as far as it goes, but it overlooks that the vulnerability of borrowers to modification scams reflects their need for a representation service. The federal government has done nothing to encourage firms that would provide this service in a responsible and transparent fashion.

The response of governments in a growing number of states has been to pass legislation making it illegal to charge in advance for modification services. From all appearances, these laws are widely disregarded.

My problem is that I don't know where to send the borrowers who write me who clearly need a representation service.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site, http://www.mtgprofessor.com.

© 2009, Jack Guttentag; Distributed by Inman News Features