Fallout: The Financial Crisis

Loan-modification firms wreak havoc

Steve Henn Sep 25, 2009
Fallout: The Financial Crisis

Loan-modification firms wreak havoc

Steve Henn Sep 25, 2009


TESS VIGELAND: According to attorneys general across the country, the biggest, most dangerous mortgage scam going right now is loan modification.

Roughly 1,000 firms popped up over the last year offering to help struggling homeowners. They’ll claim to cut your interest rate and reduce your monthly payments, in exchange for big fees, paid upfront.

As Marketplace’s Steve Henn reports, in a joint investigation with Paul Kiel of ProPublica, these firms change names, move and reorganize themselves so quickly, it can be hard to know who you’re dealing with.

Steve Henn: Late last year 21st Century Legal Services, a mortgage modification firm, made its pitch to Kathleen O’Brien. She and her husband live outside of Philadelphia. The offer seemed heaven sent.

Kathleen O’Brien: My husband is self employed. As of October of last year, we were falling into the money pit, so to say. The income wasn’t coming in as we needed and we were trying to get a break.

O’Brien had called her bank and other lenders hoping to refinance her loan.

O’Brien: I hit a brick wall and I couldn’t get anywhere.

Then 21st Century found her. It proposed a 30-year, fixed-rate mortgage. It promised an interest rate of 4 percent or less. It said that would save the couple close to half a million dollars over the life of their loan. But there was one catch — 21st Century wanted a big fee now.

O’Brien: Basically they told me don’t pay your mortgage. Alls that they wanted was $4,500 over a three-month period. I was to write then a $1,500 check and then post-date two more checks.

After the last check cleared, 21st Century stopped taking her calls. Then in April this year she got the first foreclosure notice from her bank.

O’Brien: I was scared.

She was more than $9,000 behind on her mortgage. And her bank said 21st Century had not been in contact for months.

O’Brien: And it was very difficult, because I felt like I was losing everything I worked for.

Even in the beginning O’Brien had been skeptical.

O’Brien: I went onto the Internet to check them out. They weren’t listed with the Better Business Bureau or anything else. I couldn’t find any bad information on them. After I got the foreclosure letter I went back and looked them up again and they were rated F.

Alison Southwick at the Better Business Bureau says mortgage modification firms are popping up all over. Two years ago…

Alison Southwick: There were a handful of companies that were producing hundreds of complaints across the country.

Since then, there’s been an explosion.

Southwick: Now we’re seeing hundreds and hundreds of companies producing a handful of complaints each. The situation has really become kind of like a game of Whac-a-Mole — where a company will pop up, rip off a few people or close their doors temporarily, or even just change their name.

Law enforcement and the Better Business Bureau have a hard time keeping up. Firms reorganize so quickly, checking a name isn’t even enough.

Tom McNamara was a receiver who helped the Federal Trade Commission shut down a firm called U.S. Foreclosure Relief.

Tom McNamara: It’s a boiler room operation. It’s no different than a lot of different boiler room operations that you see that operated on the fringe or on the wrong side of the law.

The firm operated under eight different names in just two years. It spent $70,000 a week on advertising. And it collected more than $9.5 million in fees. When an employee insisted they should stop telling clients that the company can halt foreclosure, a sales manager e-mailed back. Here’s an excerpt.

Original e-mail, read by an actor: If we say “WE DO NOT STOP FORECLOSURE” we are going to lose 75 percent of our business. If they implement this verbage [sic] in customer service, excuse my language but WE’RE F****ED!

The company’s lawyer said the firm’s problems were caused by a couple errant, rogue sales people who lied in e-mails and on calls. But after examining the firm’s books, McNamara doesn’t think it’s possible to run a business like this both legally and profitably. And even after the FTC and local law enforcement shut down U.S. Foreclosure Relief, the company’s employees didn’t stop working the scam.

McNamara: Just before we walked in, these guys were advertising for more sales folks.

But the company’s ads on Monster and Craig’s List didn’t mention its name. So after the FTC’s early morning raid, after McNamara fired the firm’s entire sales force…

McNamara: That afternoon, I got the resumes from just about every one of those boiler room telemarketers. And immediately — talk about Whac-a-Mole — those folks just walked across the street, sent out their resumes and started again.

Web entrepreneurs make it easy for anyone to launch their own loan modification business. There are online offers for Loan Mod kits that promise to provide “literally everything you need to know about how to start your own loan mod business from scratch.” So law enforcement officials have this simple piece of advice:

Jerry Brown: Advance payment before services are rendered is not a smart idea.

California Attorney General Jerry Brown.

Brown: Don’t give money upfront. Go first to your bank or go to Legal Aid or some other reliable service. Don’t take a stranger’s word that he can help lower your loan.

Because by the time a company builds a bad reputation, there’s very little to stop it from simply shutting down and starting up again under a new name.

I’m Steve Henn for Marketplace Money.

Vigeland: Late this week, the FBI raided the offices of 21st Century, the firm that promised to help Kathleen O’Brien.

The agency declined comment, saying the raid was part of an ongoing criminal investigation.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.