It was the subprime mortgage lending business that kick-started the financial calamity in the real estate market that eventually spread throughout the U.S. economy.
Companies that issue thousands of no- or little-documentation mortgages that required no proof of income from the borrower profited the most, packaging and selling the loans in a process that repeated itself untold millions of times.
The only people who didn’t suffer were the original lenders.
The same principle applies to the latest scam involving homeowners who most likely were victims of the subprime lending wave.
Borrowers who obtained adjustable-rate mortgages (ARMs) and whose monthly payments have ballooned are now looking to modify the terms of their loans.
John Allison, commissioner of the Mississippi Department of Banking and Consumer Finance (DBCF), said companies are preying on these borrowers.
The sales pitch goes like this: Companies promise to negotiate with whoever holds the mortgage to modify the rate, potentially saving the borrower money on monthly payments. All the borrower has to do is pay an upfront fee.
That, Allison said, is the first red flag that the company is probably not legitimate. When a company has been paid up front, there remains little motivation for it to follow through and negotiate a mortgage modification. The borrower is left with a mortgage that is still unaffordable and is out whatever the fee to the modification company was.
“It’s kind of like what Ronald Reagan said, here we go again,” said Allison.
Allison’s office has already received complaints from borrowers who have been victimized. He cited the case of one woman in South Mississippi who paid $7,000 upfront to what she thought was a legitimate mortgage modification company in Florida, only to have her ballooned monthly payment stay the same.
“What we’re seeing is these people offering to get peoples’ loan modified, reworked, to keep them out of foreclosure. The problem is, they’re asking for money up front.”
Allison is quick to point out that mortgage modification itself is not a predatory practice. He said it could be a helpful tool for homeowners who might have gotten involved in a bad mortgage in the beginning.
A legitimate mortgage modification company has to do two things, according to Allison: It has to obtain an operating license from the DBCF, and it must not ask for any money up front, other than third-party fees paid to an appraiser.
“With all the things that have gone on, and what’s coming out of Washington (as far as initiatives to help homeowners struggling with mortgage payments), we’re encouraging loan companies to work with each other,” Allison said. “Your first choice (for mortgage modification) would be your lender. They have some incentives to work with you. They certainly don’t want the house to start off with. They just want you to be paying. There are some programs the lender could use to help the borrower.”
When Allison and his staff at DBCF first started receiving complaints about illegitimate mortgage modification companies, there was some belief that their regulation would fall under the department’s debt management section. Companies offering to consolidate consumer debt can ask for fees up front. However, mortgage modification companies can not.
“The more we get into it and look at it, they’re offering to negotiate a mortgage,” Allison said. “If you use that definition, that falls strictly under our mortgage statutes. It’s expressly stated in the statute that there are no upfront fees, other than legitimate third-party fees, which would be an appraisal or something like that.”
If a homeowner is contacted by a questionable mortgage modification company, Allison said, the first thing they should do is check with DBCF to see if that company is licensed.
Homeowners should call (601) 359-1031 or toll-free 1-800-844-2499.
Contact MBJ staff writer Clay Chandler at email@example.com .