Two news items regarding mortgage fraud and foreclosure caught our eyes this week. 

The first was Treasury Secretary Timothy Geithner’s declaration of “war on the con artists who prey on homeowners desperate to keep their homes.”  The article, which ran on MSNBC.com also covered the joint announcement by the Treasury, The Department of Justice, the Department of Housing & Urban Development, the Federal Trade Commission and the Illinois Attorney General which, according to MSNBC, “provided homeowners with a high-profile warning to avoid foreclosure rescue scams and a pledge to better coordinate government efforts to stop them.”

The second story, reported in the Chicago Tribune and other news sources, announced Illinois Gov. Pat Quinn had signed a new law giving homeowners an “extra” 90 days before foreclosure.

The new Illinois law, which Quinn describes as “an important step in addressing the crisis that has swept Chicago, the state and the country”  changes little.  In fact, we expect it actually will create an even riper environment for the predators the Illinois AG and the long list of federal departments are coordinating efforts to stop.

Specifically, the new law prohibits foreclosures in the first 30 days of delinquency.  Our experience – which involves nearly 100 properties that have faced foreclosure – is that lenders typically do not move to the foreclosure process until at least 90 days of delinquency.  The law, on its face, does nothing but formalize a practice that is long-established, and creates additional hurdles for the homeowner seeking to guarantee that 90-day timeframe.

Illinois law now requires lenders to tell homeowners who are 30 days delinquent on their mortgage that they will have another 30 days to work with a credit counselor, and yet another 30 days if they see a credit counselor approved by the U.S. Department of Housing & Urban Development.  We see a couple of problems with this.

First, many of our clients who have faced foreclosure weren’t there because of poor spending habits or abuse of credit. They had jobs, purchased homes, lost jobs and were or are at risk of losing homes, or they were tricked into a fraudulent transaction which put their credit at risk.  Credit counseling simply is not a solution for these people.  Generating income or controlling fraud are.

Secondly, we expect a number of homeowners might go ahead and sign up for credit counseling to buy time, unaware that foreclosure likely would not be filed any more expeditiously without counseling. 

As of Jan. 30, 2.9 million people were 60 days or more past due on their mortgages, and one in 10 were delinquent, according to the government’s Hope Now Alliance.  The requirement for this increasing population of distressed homeowners to seek credit counseling opens the door to predators – the ones the AG and others are trying to stop – who are ready to portray themselves that role for and steal from struggling homeowners.

Others will seek the HUD-approved counselors for both the “seal of approval” and to gain 60 days, but they may find that the additional time granted is not a “bonus” for choosing a counselor whose credentials have been vetted by the agency.  That extended time likely is needed to get an appointment with these over-booked resources.

With the FBI investigating a reported 2,100 mortgage fraud cases, about 50 involving victims who are clients of our firm, resources are thin to provide the state’s requisite counseling and to control the ongoing incidents of fraud.

The scammers the AG, the Treasury and others have declared war upon have several approaches but they usually involve a payment of an upfront fee in exchange for a promise to resolve a pending foreclosure.  Some of these foreclosure “counselors” simply pocket the fee and disappear.  Others compound the fraud by tricking the homeowner into signing over the property or present forged documents suggesting the foreclosure has been set aside.

However, once a case has moved to foreclosure, even a legitimate or HUD-approved counselor cannot represent a homeowner in court and have the proceedings dismissed.  Only a licensed attorney or the homeowner him- or herself, as a pro se litigant, can represent a homeowner in court.

Furthermore, no matter how much an individual or a purported loan modification specialist engages in discussions with the bank, once the court proceeding has been started it must be dealt with.  Foreclosures just don’t “go away” in the court system, and this grave national issue won’t just go away with grandstanding gestures, such as declarations of war or hollow laws, by our government officials, such as those reported on in this past week.