Tuesday, February 13, 2007

Texas Economist Warns of Foreclosure Rescue Scams

Convinced that home foreclosures will rise dramatically in the next two years, the chief economist for the Real Estate Center at Texas A&M University warns that a new scam threatens homebuyers desperately looking for a way out of financial stress.

“Predatory lenders now offer what they call ‘rescue loans,’” said Dr. Mark Dotzour, “but homebuyers are neither rescued nor do they actually receive loans.”

Homebuyers who purchased homes with subprime loans are especially vulnerable, he said. Predatory lenders are targeting subprime borrowers who have some equity built up in a home but who are having difficulty meeting monthly mortgage payments.

Homebuyers with impaired or nonexistent credit histories often turn to subprime loans despite the higher interest that comes with them. According to Dotzour, many are about to discover that their “American dream” has turned into a nightmare.

Here is how the scam works. The homebuyer gets behind on mortgage payments. The predatory lender offers a “loan to get caught up” on the delinquent mortgage payments. In exchange for the rescue, the homeowner signs over the title to the predator, who promises that the homebuyer may remain in the home while paying rent. The predator then sells the house to someone else, and the original homeowner gets an eviction notice.

About a dozen states have passed laws designed to deter rescue loan fraud, but Texas is not one of them.

“The scam is called a loan, but it is not,” says Dotzour. “It really is a buy-out with a leaseback.”

Dotzour fears the problem is going to get much worse. As of Oct. 31, some 4 percent of borrowers who obtained subprime loans in 2006 were 60 days or more behind on payments. He said the delinquency rate is running twice that of a year ago.

“Foreclosures are up 27 percent in the last 12 months,” said the noted economist, “but that’s still low in my books. I’m betting 2007 U.S. foreclosures will double last year’s total.”

Subprime mortgage volume has increased fivefold in five years. The Mortgage Bankers Association estimates that $1.1 trillion to $1.3 trillion in subprime loans are due to adjust to higher interest rates in 2007.

“Obviously there will be a much higher foreclosure rate in the next five years,” said Dotzour, “regardless of whether there is an upswing or downswing in the economy.”

mortgage fraud