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Daily Real Estate News  |  June 3, 2008
Most Common Mortgage Scams

Scam artists may promise to save cash-strapped home owners from foreclosure but then, instead, steal their money or any remaining home equity. Such scams are becoming more prevalent, and some states are fighting back.

In Florida, one of the nation's foreclosure capitals, State Attorney General Bill McCollum has filed suit against National Foreclosure Management, a mediation company, for allegedly defrauding troubled home owners. Fraudulent rescue companies in Illinois have been increasingly penalized, while in Massachusetts the for-profit practice of foreclosure rescue transactions has been banned.

Here are the most common ploys scammers use to prey on desperate home owners:
  • Bait and switch. The home owner is presented with what appears to be an application for refinancing, but in reality it's title transfer papers. Once the home owner signs, he loses his home.
  • Upfront fees. Scammers ask for money to be used for locating rescue funding. Once the home owner pays, the scam artist disappears.
  • Bankruptcy ploys. An attorney – or someone who pretends to be – persuades the home owner that filing for bankruptcy will save the house. The only one who wins is the person who pockets the fees he charges to file.
  • Rent-to-buy. Fraudsters offer to buy the property with a provision that the home owner will pay rent while building equity. Once the title is transferred, the former home owner is locked out.
  • Fraudulent refinance deals. A scammer offers to use his higher credit score to secure a refinance deal, but first the home owner has to hand over title to the house.

Source: Forbes, Matt Woolsey (05/23/08)

How is the Seller's Credit Effected By a Shortsale?
By: Tim and Julie Harris

Sellers will take as big a hit on their credit by going through foreclosure as giving the lender a deed-in-lieu of foreclosure. Points lost on a FICO score are as follows:

Foreclosure or Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380.

Short Sale
The effect of a short sale on a seller's credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status. Which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420.

The effect on a consumer's credit report—foreclosure vs. short sale—is the difference between being hit by a train or a bus.

Here's why:

Waiting Period Before Buying Another Home

Foreclosure or Deed-in-Lieu of Foreclosure
A seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.

Short sale
A notation on a consumer's credit profile of 'settled for less than owed' (short sale) precludes the consumer from obtaining an institutional loan for 24 months, depending on the lender's program and regardless of FICO score. Fannie Mae guidelines require 24 months seasoning, and there's no way to get around this.
   
Short Sale/Foreclosure Deficiency Judgments

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Some other states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the home owner is held personally liable for loan repayment.

The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.




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