PREDATORY MORTGAGES AND FORECLOSURE RESCUE SCAMS

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The Drum Major Institute was founded by Martin Luther King Jr. Its mission has been to drive social progress and to improve citizen participation in our democracy. In October of 2007 the Institute highlighted Lori’s mortgage reforms, enacted by the Minnesota Legislature in 2007, as one of the ten best public policy proposals that year.  Lori and Senator Chuck Schumer spoke on mortgage reform at the Institute’s annual conference in New York City. A New York Times editorial heralded the Minnesota law in 2009, when Lori was asked to testify on the reforms before the United States Congress and the Federal Reserve Board. 

The reforms largely targeted predatory lending where lenders would encourage homebuyers to take out “no doc” (stated income) loans with little or no documentation showing that the buyer would be able to repay the mortgage. The profit for the lender was that it could immediately sell the mortgage (and retain a placement fee) to investment companies that only focused on the prospect that the home would increase in value. The homeowner then walked into the home after paying a sometimes small down payment but, unable to pay the monthly payments, would fall prey to fraudsters that duped the homeowner with “mortgage foreclosure assistance.”

In the first decade of the 21stcentury, tens of thousands of homeowners in foreclosure were bilked by these scam artists. One of the most prevalent scams, called “equity stripping,” followed a pattern:

• The con artist obtained lists of foreclosed homes through public notices in newspapers and government offices. The con artist then reviewed the real estate records to determine if the home’s value exceeded the amount of the mortgage. 
• If there is such equity in the home, the con artist would contact the homeowner and indicate that he would like to buy the home, or provide mortgage foreclosure assistance.
• After securing confidence from the homeowner, the con artist would then advise the homeowner that, for a “mortgage assistance fee,” he can stop the foreclosure by having the homeowner sell the home to third party, such as himself. The con artist would state that this would force the bank to re-start the foreclosure process, a process that the con artist would indicate can defer eviction for years. In the meantime, the homeowner was supposed to pay rent to the con artist, who in turn would take the rent and make the mortgage payment.  Then, when the real estate market improved, the homeowner would the option to buy the home back. 
• Of course, this was all a fiction. The con artist would pocket the rent and never pay the bank. To make matters worse, the home would still go through foreclosure. The homeowner, believing the con artist, would give up on trying to sell the home. 
• The con artist, now the owner of the property, would then sell the property and pocket the equity, the rent payments, and the mortgage assistance fee. 
• A variation on the scheme was for the con artist to tell the homeowner that the sale to a third party would allow someone with a better credit rating to get a new mortgage that could be assigned back to the homeowner. 
• Yet another variation was for the con artist to simply pocket the “mortgage assistance fee.” 

Under Lori’s watch as Solicitor General and Attorney General, the office filed dozens of lawsuits against mortgage foreclosure con artists. In some cases, the end result was an injunction to force the con artist out of the state. In other cases, the office was able to secure damages for the homeowner.