Regulators struggle to contain foreclosure fraud

The Federal Trade Commission also enforces various consumer protection laws as part of a broad portfolio of regulatory oversight that includes unfair trade practices and antitrust reviews. Over the years, its staffing has not kept up with the overall growth of the economy and population. The agency’s new chairman, Jon Leibowitz, recently testified that the FTC has about 1,100 full time employees, down from about 1,800 in 1980.

While Washington's attention recently has focused on a broad overhaul of financial regulations, efforts to tighten consumer protection laws against mortgage fraud have moved slowly. Last year, Sen. Herb Kohl, D-Wis., introduced a Senate bill to protect victims of foreclosure rescue scams. The bill died in the Senate Banking Committee.

The surge in foreclosure rescue fraud mirrors the ongoing rise in foreclosures, a trend that has proved stubbornly resistant to public and private efforts. Over a year ago, the Bush administration established the Hope Now Alliance to prod lenders to negotiate voluntary loan modifications with troubled homeowners. Though the group says it has helped several million homeowners work out new terms and payment plans, the results have been disappointing. In some cases, monthly payments increased under these new payment plans. In December, the Office of the Comptroller of the Currency issued a report noting that more than half of those modifications left homeowners facing foreclosure again within six months.

But the national attention provided a boon to foreclosure rescue scammers. Last month, the FTC shut down a New Jersey-based company called Hope Now Modifications that claimed affiliation with the widely publicized Hope Now Alliance. According to the complaint, callers to the company’s telemarketers were promised loan modifications and told they could avoid foreclosure in return for a “mitigation escrow fee.” After paying the fees, consumers either didn’t hear back or were told negotiations with lenders were proceeding smoothly. Some homeowners later found out their lender hadn’t been contacted. Those who complained to the company and asked for a refund didn’t get their money back, the FTC said.

But the case demonstrates the difficulty regulators and prosecutors have shutting down these operations. A New Jersey judge issued a restraining order against Hope Now Modifications and the site was shut down. But later that day, Leibowitz told a congressional hearing last month, the site “popped up again under a Web site registered in Germany” and was shut down again.

“So we have a little long-arm problem in terms of asserting our jurisdiction,” Leibowitz said.

Some of those offering to help distressed homeowners are former brokers, agents and appraisers who've seen their previous business evaporate after the housing market collapsed under an avalanche of rogue lending many of them participated in. Some foreclosure consultants offer legitimate services. But it's not clear whether paid advice is more effective than the help available to homeowners from nonprofit credit counselors who also work with lenders at no charge.

Some scammers have successfully tricked victims by mimicking those non-profit counseling organizations. Others have become adept at Web search marketing, buying keywords representing legitimate counseling organizations.

Neighborworks America, a national housing advocacy group, filed two trademark complaints last month with online search engines to prevent companies from using the group's name and logo to promote foreclosure rescue schemes.

One company offering referrals for a variety of financial services is riding the coattails of the  Treasury’s Web site, www.financialstability.gov , which Treasury Secretary Geithner touted in Monday’s announcement. The official site is devoted to the government’s various efforts to bail out the financial system and help homeowners avoid foreclosure. Web surfers who navigate to the unrelated www.financialstability.org are referred to dozens of links purporting to help consumers “Get out of Debt,” “Stop Foreclosure Now” and get “Payday Loans in 1 hour.”

According to Whois.net, financialstability.org is registered to Admin Search Marketing, Ltd, based in Tortola in the British Virgin Islands. A company representative was not immediately available for comment.

In most cases, prosecutors who catch foreclosures rescue scammers opt for civil actions aimed at recovering money for bilked consumers. Few cases result in criminal penalties.

That may be changing as state attorneys general begin gearing up to go after the latest wave of mortgage fraud. This year, Arizona Attorney General Terry Goddard brought three cases charging felony theft, fraud and money laundering. Two defendants pleaded guilty; a third case is pending. California’s attorney general won convictions last year against three people who stole more than $700,000 in upfront fees of $1,500 to $5,000; those sentences ranged from probation to six years in prison.

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