Most California homeowners who bought or refinanced after 2001, the super-heated years of the Millennium Boom, are underwater with negative equities. Their family balance sheets are in the red, insolvent. Since then prices have plummeted: the low tier is near bottom and the high tier is descending rapidly as 2011 approaches.
Many negative-equity owners are now further victimized by the operations of unscrupulous loan modification services, those who charge an upfront fee to negotiate a loan modification with the homeowner’s mortgage lender. After the homeowner advances the funds, the individual receiving the funds does nothing which achieves results, effectively stealing the homeowner’s money.
To protect consumers, the California Department of Real Estate (DRE) advises the following:
- after a lender records a notice of default (NOD), no loan modification service may collect any advance fees from the homeowner, even if they have a real estate license or are an attorney;
- if an NOD has not been recorded, a modification service may charge an advance fee if the homeowner enters into a retainer agreement explaining the services and costs. However, the fee agreement they use must be approved by the DRE. Advance fees must be placed in a trust account and can only be disbursed when the services have been rendered. [For more information on the DRE’s advance fee agreement requirements, see the DRE’s Introduction to Sample Advance Fee Agreement.]
The federal Department of Housing and Urban Development (HUD) is funding $79 million in grants to HUD-approved housing counseling agencies and state housing finance agencies around the country. $55 million will be allocated to comprehensive counseling, $14.5 million for supplemental funding for assistance with mortgage scams and mortgage modifications and $9.5 million for reverse mortgages.
These agencies provide homeowners with free counseling services covering how to:
- avoid foreclosure;
- avoid mortgage scams;
- purchase or rent a home;
- improve credit scores; and
- qualify for a reverse mortgage.
In October 2009, California ended the use of advance fees for loan modification services and required consumers to be notified of the free services offered from nonprofit government-approved agencies.