Bulletin: VT2008001

Dear Associates:

Recent economic conditions have led to a substantial increase in mortgage defaults and foreclosures. As is often the case, there are opportunists who will prey upon the disadvantaged. In our industry, this is taking the form of companies and/or individuals who purport to rescue homeowners from their dire economic circumstances. What makes this difficult for us is that there are legitimate foreclosure saver companies among the fraudulent ones.

The following is a typical fraudulent foreclosure rescue scam:

Homeowner is misled into believing that they can prevent the impending foreclosure in exchange for a transfer of the deed, and up-front fees. Homeowner agrees to lease back the property following the transfer in order to remain the primary occupant of the home. The rescue company pockets the fees and the third party buyer re-mortgages the property. The new loan, which is usually taken at less favorable interest rates, goes into default due to non-payment, and within months, the new lender forecloses the property. The original homeowner has lost the fees paid to the rescue company and the property is still lost due to foreclosure.

While some states have passed legislation prohibiting "for profit" foreclosure rescue transactions, Vermont has not done so to date. (Vermont relies on its Consumer Fraud Statute, found in 9 V.S.A. Chapter 63 for protection of its consumers). Accordingly, agents must be extremely careful before insuring any transaction that is, or appears to be, a foreclosure saver. If you have any doubt or question about the transaction, call the State underwriting counsel.

Some red flags to watch for:

• The existing loan is in default.
  
  
• The owner is deeding the property to the buyer, but is staying in the property beyond a normal "leaseback." There may be a contemporaneous lease or a second contract allowing the owner/seller to repurchase the property.
  
  
• The buyer is a non-resident individual or entity, usually arranged through a third party company with a name like "foreclosure savers."
  
  
• The consideration is substantially less than fair market value, especially if the consideration is the balance remaining on the existing mortgage(s). The buyer is taking title subject to the existing loans.
  
  
• The buyer is taking out a loan which effectively strips the equity from the property, either at closing or shortly thereafter.
  
  
• The seller requests the settlement statement be prepared in a way not in conformity to standard sale/purchase practices.
  
  
• There are miscellaneous or inflated fees on the HUD, made payable to the foreclosure rescue company.

For on-line viewing of this and other bulletins, log onto http://www.vuwriter.com.