I hate to be mean but people who purchased homes that they can not afford should lose their houses. They made a bet and lost. Now why all the tears! I think both the banks (for alack underwriting) and the homeowner should lose.

Monitoring mediators: There?s very little oversight for influx of mortgage modification companies

By Sean Sposito/The Star-Ledger
March 01, 2010, 7:00AM

When the monthly mortgage payment rose on his Hasbrouck Heights homes, Juan Paulino turned to a mortgage modification company.

When Juan Paulino bought his three-bedroom ranch in Hasbrouck Heights in 2005, he took out the only loan he could afford: an adjustable-rate mortgage.

But what seemed like a good deal at the time turned sour four years later, when the rate reset upward and his monthly payments suddenly jumped more than one-third.

Desperate to lower his $4,000 monthly payment, he hired a mortgage modification company to negotiate better terms with his bank. For $2,700, Dunwell Financial Solutions in Jersey City assigned an adviser to steer Paulino through the daunting process, resulting in a deal that cut his payments in half.

?I didn?t want to lose my house,? said Paulino, 58, a Continental Airlines cargo agent. ?It was a bad situation that I couldn?t afford.?

But Paulino?s success story might soon be the exception rather than the rule. Since March, when the Obama administration launched a mortgage modification program to help stall the foreclosure crisis, federal and state regulators have been cracking down on an emerging ?cottage industry? of so-called mediators. Many of them are unlicensed firms looking to snap up government incentives by duping desperate homeowners with promises they can?t deliver.

In New Jersey, a dozen modification outfits have already come under the scrutiny of state regulators. In November alone, the state fined nine firms at least $5,000 each for allegedly offering loan modification services to consumers without a proper license.

And in July, the state Attorney General?s Office filed two separate lawsuits charging 10 people with fraud after they promised to help modify mortgages for residents struggling to keep their homes.

In one instance, regulators accused Newark-based New Day Financial Solutions of failing to stand behind a ?100 percent money-back guarantee? it had advertised. Instead, New Day in many instances actually put customers ?in worse financial standing by instructing them to stop paying their mortgages,? according to a statement by the Attorney General?s Office.

DEMAND RISING

It isn?t hard to see why mortgage modifications are so appealing. For a fee, an adviser works with a homeowner?s bank to reduce their mortgage payments by lowering interest rates, extending payment terms and reducing principal.

Seeking to encourage such activity, the federal government?s $75 billion program rewards servicers $1,000 for each modification and another $1,000 annually for three years if the borrower stays current. Homeowners, meanwhile, can get up to $1,000 deducted from their loan principals each year for five years if they keep up with payments.

But these mortgage modifications have come under fire recently, with some research arguing they might only delay the inevitable. Earlier this month, credit rating agency Standard & Poor?s issued a report that said most recipients of such modifications tend to default again later.
Nevertheless, in New Jersey and across the country, the demand for mortgage modifications continues to far outpace supply.

Nearly 28,000 Garden State homeowners have enrolled in the year since the U.S. Treasury Department launched the program. As of January, about 13 percent of them had received permanent modifications.

There are currently only 23 governmental and nonprofit agencies licensed in New Jersey to offer financial assistance or counseling to borrowers in foreclosure. But the high level of demand is ?outstripping their ability to staff up,? said Patrick O?Keefe, chief economist for Roseland-based accounting firm J.H. Cohn.

Meanwhile, those homeowners still left without help are falling prey to a growing slew of entrepreneurs who are eager to turn a quick profit, regulators say.

?My concern is with these firms that are popping up that are operating without any license,? Assistant Attorney General James Savage said. ?They are just doing business illegally.?

NO REAL STANDARDS

There is no official count on just how many of these illegal firms are out there. The Attorney General?s Office said it usually only investigates a company if it notices deceptive advertising or if a consumer has filed a complaint.

But regulators have noticed trends. Some mortgage mediators, for example, are just former mortgage brokers who switched over after they spotted a more lucrative opportunity, Savage said.

?Once the banks stopped lending in the face of the financial meltdown these people put on a different hat,? he said.

Other mediators say they simply saw a good business prospect in a relatively untouched niche, but had no intentions of breaking any laws.

Mortgage banker Joe Cage said his firm, Premier Services & Consultants, is now pursuing bankruptcy after state regulators fined him in November for allegedly offering loan modification services without a license.

?It is a new industry and there are no real standards right now,? said Cage, of Voorhees.
But he added: ?It?s not worth having a tarnished banking reputation because you tried to do a loan modification.?

The state, recognizing the industry is largely unregulated, has recently taken steps to lay some ground rules. Over the summer, the state judiciary?s Advisory Committee on Professional Ethics issued an opinion outlining who can and cannot help borrowers modify their mortgages.

The committee, alarmed by complaints about bogus firms partnering with attorneys to build credibility, also banned lawyers from working with or splitting fees with these companies.

But the new rules came too late for at least one attorney. Ira Metrick, of Freehold, said one mortgage modification firm that sent him clients later left him to clean up a financial mess.

The firm, Financial Solutions Today, was among those fined by the state last fall.

?Financial Solutions left me holding the bag saying: ?Everybody go call Ira,? ? he said. ?I gave every one of those clients their money back.?

Despite the prevalence of fraud, however, some experts say the enormous appetite for these unlicensed modifiers is understandable considering millions of Americans currently face the threat of foreclosure.

?Somebody is out there providing a service for a fee and you either hire them or you don?t,? said Michael Schonberger, a Princeton attorney who teaches real estate finance at Rutgers University. ?People can overpay for things because it gives them some sort of comfort level.?
Warning Signs of a Loan Modification Scam
1. You are asked to pay large, upfront fees for mortgage loan modification help.
2. Help is offered by a ?homeowner consultant? or ?financial counselor? and not a Department of Banking and Insurance-licensed ?debt adjuster.?
3. You?re told not to make your mortgage payments.
4. You?re told not to contact your mortgage lender because the person or company offering you assistance will handle all the details
5. You?re told to make future payments to a new person or firm without informing your current mortgage lender or provider.
To file a complaint, go to njconsumerafairs.gov
Source: NJ Department of Banking and Insurance, NJ Division of Consumer Affairs

Sean Sposito may be reached at ssposito@starledger.com or (973) 392-4018.