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How Obama and the FTC Hurt the Homeowner

The loan modification service industry may very well be the most controversial industry in existence today beating out brothels and drug dealers for this illustrious honor. The Loan Workout industry didn't just spring up out of nowhere. It has it's roots in a different decade; the 80's. Back then must have been a simpler time because the industry was looked at as helping and not a determent to the homeowners. The industry has always existed since then but it scaled way back in the years of excess.

Yep, I'm talking about when you could call up a mortgage broker and tell them you wanted a loan for hundreds of thousands of dollars but you also wanted a payment in the hundreds of dollars. The nice loan agent (what was his name again?) would punch in some numbers and say "I've got the perfect mortgage for you. It's got a low interest rate AND a low payment". Little did the homeowner know most of the time that in the fine print the low rate was a teaser rate and the low payment would balloon to a much larger one in a few short years. They had just been sold a Negatively Amortizing loan. It would take a few years for the homeowners to catch on though. You would think they would be ringing the phones at the local loan on tax return modification business off the hook. Nope. They simply refinanced into another loan with much the same terms as before using their imaginary equity to pay for it all.

Eventually the bubble burst and that's when loan modifications became mainstream again. It happened so fast that nary a regulation truly existed for the industry. This time around the demand rose so quickly that it drew not only legitimate business entrepreneurs but also full on criminal enterprise. The criminals used such tactics as "take the money and run" and more elaborate hoaxes whereby the homeowner unwittingly transferred the deed to the criminals and never got it back. How widespread were these frauds? Well to listen to Timothy Geithner it sounds like almost every company out there was one of these fraudsters.

Government cracking down on mortgage scams

by The Associated Press Published: April 6, 2009

Top federal and state officials on Monday announced a broad crackdown on mortgage modification scams, accusing "criminal actors" of preying on desperate borrowers caught up in the nation's housing crisis.

Government officials say scammers are seeking to take advantage of borrowers in danger of default. The frauds often involve companies with official-sounding names designed to make borrowers think they are taking advantage of the Obama administration's efforts to help modify or refinance 7 to 9 million mortgages.

Officials say such operations almost always are fraudulent, and that help is available for free from government-approved housing counselors.

"These predatory scams callously rob Americans of their savings and potentially their homes," Treasury Secretary Timothy Geithner said Monday. "We will shut down fraudulent companies more quickly than before. We will target companies that otherwise would have gone unnoticed under the radar."

The Federal Trade Commission has sent warning letters to 71 companies it says were running suspicious advertisements and has filed five new civil cases to halt illegal loan modification scams. Attorney General Eric Holder says the FBI is investigating about 2,100 mortgage fraud cases.

"If you discriminate against borrowers or prey on vulnerable homeowners with fraudulent mortgage schemes, we will find you, and we will punish you," Holder said.

Wow, 2100 cases of mortgage fraud! That's a lot right? Nope. You see mortgage fraud usually entails the process when the mortgage was originally sold, underwritten, and attached to the property. In fact a whole industry exists just to forensically review a mortgage before it is finalized to ensure no laws or statutes were broken. How many cases existed against loan modification companies at the time. In the year previous to the statement the FTC brought a total of 11 cases against the loan modification industry specifically. You read that right, 11.

Shortly after Timothy's speech the president himself, Barack Obama, parroted the same figures. The Loan Modification Industry was hit hard. Exact numbers are hard to come by but industry insiders say that response to marketing was cut nearly in half. This sent the whole industry scrambling to stay afloat. As if this was not enough the local and state regulatory bodies had taken to writing regulation about the industry quicker then bell bottom pants caught on. Unfortunately most of this legislation or regulation was not well thought out and hurt the homeowner the most. Let me explain.

At the time it was notoriously difficult (and for the most part it still is) to get a loan modification on your own. Yet, that is exactly what the President suggested. Well to be fair he also pointed out free government run programs. Programs which were understaffed and most importantly under experienced. Many people walked into these free seminars or called the free hot-lines and reported learning nothing new. Non-profit groups existed too but suffered the same problems. Loan modifications under non-profits had a dismal success rate. The people who had the best chance of getting a loan modification were the ones who disregarded Timothy and Barack and paid an up-front fee to a for-profit company. These companies had success rates ranging from 50-80% which often times meant you were twice as likely to get a loan mod by entrusting a for-profit company then by doing it yourself or putting your faith in a non-profit. Therefore any pressures which put loan modifications companies out of business ultimately hurt the homeowners. Especially affected were the ones who had loan modifications in process. These were just abandoned with the companies declaring bankruptcy.

Little did the industry know that a much more sinister force was brewing which would all but wipe out loan modification companies entirely. Quietly the FTC (not wanting to be caught with it's pants down in a lie by the President himself) was employing investigators and spending hundreds of thousands in tax payer money to investigate the thousands of complaints against individual companies. Now I know what you are thinking. If there were thousands of complaints then the industry must have been fraudulent. Let me explain.

Remember that even the most successful companies only achieved an 80% success rate. This is likely to infuriate many who paid for the service. While many companies refunded this money in time the homeowner may lose their home. But is the loan mod company to blame? Wouldn't the home had been lost if the homeowner did nothing? What if they contacted the bank themselves? Well remember that the loan modification company did not turn down the customer. It was the BANK ITSELF which denied the homeowner modified terms. Chances are the same conclusion would be reached if the homeowner represented themselves. Add these 20-50% of clients with those who felt they shouldn't have to pay since free services exist from the government or they could have done it themselves and you have an industry rife with complaint; but NOT fraud.

In the end the FTC in cooperation with an immense propaganda campaign lit the whole industry in a very ugly light while simultaneously taking action against 178 companies. The operation was named in true propagandist style as "Operation Loan Lies". With a name like that how could you root for this industry any longer? Most of the companies were already struggling to get by were now hit with the prospect of huge legal fees. Many choose to roll over and play dead. What happened in the process was the largest abandoning of loan modification case files probably in the history of the United States of America. Many companies just laid off all their employees and called it quits rather then put up an expensive defense against allegations they knew were untrue.

The largest lesson anybody learned out of "Operation Loan Lies" is that corporations may be responsible but the individual is not. Oh don't get me wrong, the executives of companies were named. What was glaringly obvious in reading the complaints to anyone on the inside though was that the allegations did not accurately describe the policies and modus operandi of the companies. Instead it detailed often infamous cases of individual sales people lying and cheating their way to a sale. All these employees had been terminated for cause long ago, yet not a single individual was named in the lawsuits. In addition a majority of the complainants had indeed received a loan modification and yet choose to complain to the FTC anyways.

This whole tale is a lesson on how regulation while needed can be as detrimental as it is helpful to the citizens. The key is for collaboration, and opportunity for public comment to take place. Without those things regulation can be one of the most destructive forces around.

Bryan Sheasby spends most his free time writing and blogging about much less controversial topics like which combination of f-stop, shutter speed and ISO to use. You can see him and his wife's photography and blogging at http://www.shezphoto.com.