For people about to lose their homes to foreclosure, the advertisements are like a lifeline: "WE BUY HOUSES FOR CA$H," or "Refinance Your Mortgage! And Receive a 7 Day Vacation."
These so-called mortgage-rescue companies promise that for fees of about $1,000 to $2,500, they can negotiate loans with providers to get owners lower monthly payments. Or they offer deals that suggest homeowners temporarily deed their homes to the company or a third party, theoretically to allow the homeowners time to get back on their feet financially.
But in some cases, these "solutions" have turned out to be far worse than the problem.
At a time when the subprime mortgage crisis has caused a record number of homeowners to enter foreclosure, scam artists have made a bustling industry of preying on people's desperation to save their homes.
States are leading the effort to help homeowners avoid these scams; at least 18 states have laws banning foreclosure-rescue scams by limiting some of the practices that lead to them, and six of them - Idaho, Maine, Nebraska, Oregon, Virginia and Washington - enacted laws just this year, according to the National Conference of State Legislatures . A similar bill is now on the desk of Florida Gov. Charlie Crist (R).
The measures include giving homeowners a few days to cancel their contracts with these companies without penalty, requiring that a homeowner receives at least 80 to 82 percent of a house's fair market value if it's sold and requiring a written contract, which may even designate the size of type it contains.
"You've got to let the word get out there that we're not going to tolerate preying on people who are at the bottom of despair," said Washington state Rep. Patricia Lantz (D), who sponsored her state's bill. "This is a deterrent to the worst of the worst."
Before this year, Maryland already had a law that targeted foreclosure scams, but during the recent legislative session, the state enacted the country's toughest statute: a ban on all rescue transactions that involve homeowners signing away the deeds to their homes.
Only Washington, D.C., which acted this year, and Massachusetts have similarly stringent rules. The Bay State permanently banned for-profit foreclosure-rescue transactions through a regulation issued by the attorney general.
Legitimate foreclosure rescue services are often nonprofits and don't normally charge upfront fees; also, homeowners usually come to them seeking help.
The scammers, on the other hand, find potential victims by combing through public records to see who is in danger of being foreclosed. Then they bombard them with calls or direct-mail solicitations that sometimes look like letters from a government agency. One company that operated in Idaho sent out notices to homeowners falsely claiming that their homes were "scheduled to be sold at auction" and instructing them to call the company. In some cases, consultants have even shown up on owners' doorsteps to drum up business.
In one type of scam, a consultant demands an upfront fee of $1,000 or more to negotiate with the loan provider on the owner's behalf for a more affordable loan, but then the company does little or nothing. Besides being $1,000 poorer, the owner also has lost valuable time he or she could have used to work out a plan with the provider.
April Charney, an attorney at Jacksonville Area Legal Aid in Florida, said she has a client who paid $1,200 to HomeSavers USA to help her work out a deal with her loan provider. The company - which in February reached an agreement with the Illinois attorney general to stop operating in the state - took the money and then did little to help the client. Now Charney is trying to negotiate to get the $1,200 applied to her client's mortgage.
"Instead of having that money applied to her mortgage arrears, which might have brought her current, it just sunk her further in the hole," Charney said.
In another common rescue scheme, the foreclosure consultant convinces a homeowner to sign over the home's title, either to the consultant or a third party. The homeowner remains in the house and pays rent, believing that he is buying time to get back on track and that the consultant will eventually sell the home back to him again.
But in some cases, the rent charged to the homeowner is even higher than the mortgage payments. If the homeowner can't pay, he's evicted. Or the consultant refinances the house, often multiple times, draining the equity.
Sometimes, property owners don't even know they have given away their homes. In Florida, many of the victims of this scam are elderly, uneducated or don't speak English, said Carolina Lombardi, a staff attorney at Legal Services of Greater Miami, Inc .
"They're literally tricked. They sign a stack of papers with no concept they're signing a deed. They think they're refinancing," she said. "Or they know they're signing their deed, but they're told, 'we're just holding this for you until you establish you can improve your credit.' They're desperate, and it seems reasonable."
Without laws against rescue scams, prosecutors can go after the perpetrators by claiming they violated deceptive-advertising statutes, but the threshold for proving fraud is high. Additionally, when the scammer produces a stack of contracts the victims have signed - even if the owners were deceived about what they were signing - prosecutors have no case against the rescue consultants.
State attorneys general are often the driving force pushing for their states' laws. Massachusetts Attorney General Martha Coakley (D) in September bypassed the Legislature and issued a regulation banning for-profit rescue transactions under the state's consumer protection act. An attorney at Florida Legal Services said her group had futilely tried to get a law enacted for years, and this year's bill passed only because it was proposed by Attorney General Bill McCollum (R).
Illinois Attorney General Lisa Madigan (D) saw early on the looming problem posed by rescue scams. The Legislature passed a bill she drafted in 2006, which gives homeowners five days to cancel a rescue contract and requires rescue firms to pay the homeowner at least 82 percent of the fair market value if he or she cannot buy back a home after signing the deed away.
"These people are parasites, and they are attacking the people who are already desperate and who are vulnerable," she told Stateline.org . "It's the worst financial scam that we've seen perpetuated against homeowners."
Since the law's enactment, Madigan has reached a settlement with at least one company, HomeSavers USA, that bans it from operating in the state, and her office has 12 current lawsuits against rescue schemes.
At the same time, she has seen a drop in activity. "A lot of these individuals and companies that were running these scams have left Illinois. It's not beneficial for them," Madigan said.
Other states' attorneys general have also been targeting the foreclosure rescue consultants.
In March, Idaho's attorney general reached an agreement with one company to stop doing business in the state. The Washington state attorney general got Foreclosure Assistance LLC to agree to refund about $75,125 to 200 customers, though the $300 to $500 each victim will get is far less than the $1,200 to $1,500 each one paid the company.