Mortgage rescue or rip off?
Many for-profit companies now offer foreclosure counseling services to at-risk homeowners. Are they worth the price?
| Special Report |
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| 30 yr refi | 3.82% |
| 15 yr refi | 3.20% |
NEW YORK (CNNMoney.com) -- If mortgage lending was the Wild West during the boom years, foreclosure-prevention counseling is the lucrative new frontier of the bust.
Nearly 1.6 million borrowers are in jeopardy of losing their homes this year, according to economist Mark Zandi of Moody's Economy.com, and thousands of new foreclosure-rescue companies are rushing in to offer the troubled homeowners loan work-out assistance. For a price.
Usually homeowners seeking mortgage modifications call their lenders directly or work with non-profit community groups. But many borrowers are now turning to for-profit companies as their mailboxes are flooded with work-out offers.
Each day private firms go online or visit courthouses across the country to pore over foreclosure filings, which are public records. "By 10 or 11 o'clock, they've mailed out solicitations to anyone with a foreclosure filing that day, promising to save their homes," says Jeff Hart, a prosecutor with the Ohio attorney general's office.
Once a borrower contacts a foreclosure-prevention company, the counselor takes their financial information, analyzes how much the client can afford, and then contacts the lender and negotiates new mortgage terms.
Those modifications can involve reducing interest rates, lengthening the term of the loan or even lowering principal. In exchange, the consumer agrees to pay a fee, generally between a month's mortgage payment and 1% of the mortgage's principal.
"We attack the case from many different angles," said Justin Pane, vice president of Amerimod Modification Agency, which Pane said has been doing foreclosure prevention modifications for about three years. "We may do a forensic document audit, for example," he added, which involves examining original mortgage papers to see if anything illegal or unethical was signed during closing. If so, it can be used as leverage for a better deal from lenders.
There are other tricks of the trade, too. Pane said it's often beneficial to apply for modifications near the end of fiscal quarters when lenders want non-performing loans placed back in the performing columns. The more loans they can transfer, the better their numbers look in SEC filings. As a result, lenders will often be more generous in their modification offers at that time.
Lifestyle counseling is another often-necessary service. "We tell people what they have to do," said Donnie Shorts, owner of Mortgage Mitigation Services in Dallas. "Get rid of that cable. Sell that Escalade. If we can't present a good case to the lender that these borrowers have changed, we're dead in the water."
But is it wise for troubled borrowers to pay stiff premiums for services they can get for free? Especially when paying for a modification can make one harder to obtain because borrowers have less cash to spend on reducing debt.
"Folks need to be really careful," said Chris Kukla, a spokesman for the Center for Responsible Lending. "In many cases, these are no better than scams. You should look at all your low-price or free options before signing on with a for-profit company."
One of the main criticisms of for-profit foreclosure counselors is that they are not regulated, with oversight laws varying state by state. As a result, some marginal characters are drawn to the industry, ones who use high-pressure sales tactics and play on fear.
Many firms demand hefty up-front fees, which they keep even if a loan is not successfully modified. Only a dozen states, including Minnesota, New Jersey, New York, Nevada, Massachusetts and Maryland, prohibit that tactic.
"Loan modification is a growth industry, with too few rules governing those selling loan mod services," said Kurt Eggert, a law professor at the Chapman University School of Law.
And, in fact, many consumers who sign on with a for-profit counselor later ended up at a non-profit. "A lot of people come in [to our offices] who have paid money, a couple of thousand sometimes, for foreclosure prevention and nothing is done for them" said Jenelle Dame, a counselor for the East Side Organizing Project (ESOP) in Cleveland. "These companies are sending out postcards to people saying they can help. Some borrowers get like 50 a day."
"The lenders still make the same calculations," added Eggert. "Whether they're better off modifying a mortgage or letting the loan go to foreclosure is not affected by who's arranging the modification."
Terry Souers, who handles many mortgage-modification cases for Genworth Financial, the private mortgage insurer, said his company will work with a for-profit if a client asks, but those requests are minimal. "We don't recommend them," he said. "We can do what they do for free."
Borrowers can protect themselves several ways. Start by checking with the Better Business Bureau and state attorneys-general consumer-protection offices for complaints against the firms. Also ask any potential foreclosure-prevention counselor how many cases they've successfully completed and what kinds of loans are winning workouts.
"These companies don't seem very transparent about their credentials. If you're not getting answers you trust, look elsewhere," said Marietta Rodriguez, director of homeowner programs for NeighborWorks, a community development group.
"Be leery of up front fees," advised Don Lampe, a North Carolina attorney who has testified before Congress on mortgage issues. Many companies who charge them simply take the money and run. The fees should be contingent on a successful modification.
Finally, watch out for extravagant promises. "If they claim they can save your home before even speaking to you, they're making it up," said prosecutor Hart.
Before contracting with a for-profit company, at-risk borrowers should contact their lenders or the Homeowner's Help Hotline (1-888-995-HOPE) run by the Homeowner's Preservation Foundation. They might get a comprehensive, affordable mortgage modification that won't cost them a dime. 
