The current foreclosure crisis has provided persons who may perpetrate mortgage foreclosure rescue and loan modification schemes with unprecedented opportunities to profit from homeowners desperate to save their homes. In March 2010, we reported that national default and foreclosure rates rose sharply from 2005 through 2009, to the highest level in 29 years. The most recent data from the Mortgage Bankers Association, which are for the first quarter of 2010, show that the number of home loans with payments more than 60 days past due, and therefore potentially facing foreclosure, is 2.7 million. As shown in figure 1, California and Florida have the highest numbers of potential foreclosures. The foreclosure process has several possible outcomes, but the homeowner generally loses the property, typically because it is sold to repay the outstanding debt or is repossessed by the lender. In response to the rising number of defaults and foreclosures, the administration announced the Making Home Affordable Program in February 2009, which includes a number of programs intended to assist homeowners facing potential foreclosure, including the Home Affordable Modification Program (HAMP). Under HAMP, Treasury shares the cost of reducing the borrower’s monthly mortgage payments with mortgage holders and investors so that homeowners might realize a reduction in their monthly mortgage payments. In addition to HAMP, there are other foreclosure prevention programs aimed at providing assistance to homeowners, including both governmental and private programs. For example, the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac have their own loan modification programs. Refinances are also available under the GSE Home Affordable Refinance Programs, and the Federal Housing Administration’s (FHA) Hope for Homeowners Program, which permits eligible homeowners to lower their monthly mortgage payments by refinancing their mortgage loans into fixed-term market rate loans. In addition, individual private financial institutions offer their own proprietary loan modification programs for homeowners who do not qualify for HAMP. Moreover, free counseling services, such as those provided by HUD-certified counseling agencies, are available to homeowners seeking to avoid foreclosure. One way that homeowners can access these counseling services is by calling the Homeowner’s HOPE™ Hotline (1-888-995-HOPE), which is run by a nonprofit organization that works with a coalition of governmental agencies, financial services institutions, and other nonprofit groups to help homeowners struggling to make their monthly mortgage payments. A number of federal and state law enforcement agencies perform different roles and use different legal authorities in their efforts to combat various types of financial- and mortgage-related crimes, including protecting consumers from foreclosure rescue and loan modification schemes (see table 1). Within the federal government, FTC, the U.S. Postal Inspection Service, and agencies within DOJ and Treasury all have key roles regarding the investigation and prosecution of persons who have engaged in these types of schemes. As we discuss later in this report, State Attorneys General and regulatory agencies also play key roles in combating these schemes. Officials with whom we spoke described several deceptive practices relating to foreclosure rescue and loan modification schemes that victimize vulnerable homeowners. Most officials are currently concerned with one particular loan modification scheme in which persons engaging in a scheme to defraud homeowners charge a fee in advance (typically, a fee of thousands of dollars) for the service of ensuring the modification of their mortgage loan to a loan with lower monthly payments, but they do not provide this service. Law enforcement officials reported that these schemes are difficult to combat because persons engaging in such schemes can start up or shut down their activities quickly and can do so across state lines. Although data that can provide a reliable indicator of prevalence are limited, information available to federal and state agencies and nonprofit organizations, such as consumer complaints and the number of enforcement actions, suggests that these schemes are a problem. Many federal and state officials that we interviewed identified the following two principal types of foreclosure rescue and loan modification schemes perpetrated against consumers: advance-fee loan modification schemes and sales-leaseback schemes. These officials more often pointed to the advance-fee loan modification scheme as the type currently most prevalent. These schemes are broadly described as follows: Advance-fee loan modification schemes: Federal and state officials with whom we have spoken, as well as nonprofit studies, reported that these schemes take the form of a person charging a fee in advance to negotiate someone’s mortgage with the mortgage lender, often with a money-back guarantee, then providing little or no services and not refunding the fee. In 25 of the 28 enforcement actions that FTC brought in 2008 and 2009 on the basis of foreclosure rescue and loan modification schemes, FTC alleged that the defendants charged an advance fee for services that were not performed. In addition, information that the Lawyers’ Committee for Civil Rights Under Law (Lawyers’ Committee) provided to us indicated that as of May 7, 2010, the average amount paid by homeowners for services they reported that they did not receive is about $3,000. A National Community Reinvestment Coalition—a nonprofit organization—study and an FTC press release, also indicated that persons engaged in this type of scheme may make misrepresentations to consumers regarding their ability to obtain a loan modification, such as claiming high success rates or special relationships with mortgage lenders. For example, 9 of FTC’s 28 enforcement actions alleged that the defendants misrepresented their affiliation with the federal government, a mortgage servicer or lender, or a nonprofit organization. In addition, as reported by FTC and evidenced by research conducted by the National Community Reinvestment Coalition, these schemes put homeowners in further jeopardy of losing their homes because they were instructed not to pay their mortgage or not to talk with the servicer, thereby increasing the likelihood that they would lose their home to foreclosure. See figure 1 for an illustration of how this scheme r an illustration of how this scheme may work. may work. Sales-leaseback schemes: An FTC official, state officials from three of our five case-study states, and two recent nonprofit studies also cited another type of foreclosure rescue scheme. The names used to describe the schemes vary, and the methods vary as well. Federal agencies and nonprofit sources explain that these schemes generally involve someone convincing a homeowner at risk of foreclosure to transfer the deed of their home to them as a means of saving the home from foreclosure. The person then has control of the property and can make money by either taking out a second loan on the home or selling the home. According to these sources, the original homeowner is permitted to lease the home from the person engaging in the scheme and told that he or she may buy the property back in the future. However, the person engaging in the scheme may have no intention of selling the property back to the original homeowner and may make the terms of the buy-back agreement too difficult for the original owner to comply with, thereby resulting in the homeowner losing the property. FTC and state officials believe that these schemes were more predominant before the decline in housing prices because higher housing prices provided more equity for persons engaging in the scheme to take from a homeowner, and the loans needed to refinance the homes were more readily available. Information provided by federal and state officials indicates that newer schemes have been emerging. For example, a March 2010 FTC consumer alert warned consumers to watch out for a forensic mortgage loan audit scam, which it explained as a “new twist on foreclosure rescue fraud.” In this scheme, someone charges a fee to conduct an “audit” intended to find regulatory violations in the mortgage loan origination in order to allow the homeowner to use the “audit” results to avoid foreclosure, accelerate the loan modification process, reduce the loan principal, or even cancel the loan. According to the FTC consumer alert, there is no evidence that forensic mortgage loan audits will help borrowers obtain a loan modification or any other foreclosure relief, even if the audits are conducted by a licensed, legitimate, and trained auditor; mortgage professional; or lawyer. Similarly, in May 2010, based on information provided in Suspicious Activity Reports (SAR), FinCEN described variations of advance-fee scams in which a person promises to eliminate a homeowner’s mortgage or other debt on the premise that the debts were illegal or the government would assume responsibility. Federal and state officials and representatives of nonprofit organizations told us that persons who have conducted foreclosure rescue schemes include former mortgage industry professionals who had been involved in the subprime market; career scam-artists; and licensed professionals, such as attorneys who allow their names or licenses to be used by those perpetrating schemes to add credibility to their promises to provide relief. Federal and state officials and nonprofit representatives explained that former mortgage industry professionals who had been involved in subprime lending became involved in these schemes because their businesses had slowed due to the foreclosure crisis and they were looking for new sources of income. In addition, Federal Bureau of Investigation (FBI) officials noted that career scam-artists gravitate toward these types of schemes whenever the federal government creates programs to assist people in desperate circumstances, such as the programs the government began promoting in early 2009, because scam-artists can claim that they are affiliated with a federal program as a way to gain people’s trust. As indicated by an official from the Florida State Attorney General’s office, because of coverage in the news media and other public sources, federal programs provide scam-artists with a “new script” with which they can attract consumers. Officials from four of our five case-study states also said that attorneys can provide cover for third parties that perpetrate these schemes, particularly in states that have laws that prohibit firms from charging advance fees but have exemptions for licensed attorneys. Most notably, the State Bar of California, according to one if its officials, created an internal task force to investigate consumer complaints related to loan modification companies in California because complaints had increased significantly between December 2008 and March 2009 regarding attorney involvement in loan modification schemes. During this period, according to the official, companies recruited attorneys to circumvent the state law prohibiting advance fees.