I’ve posted before about the advantages of trying to mediate with your lender if you find yourself in a mortgage foreclosure situation.  Many cases that end up in court could have been resolved before it gets there.  Some people are so embarrassed by being in that situatoin they simply fail to respond until it’s too late.  Other people just don’t know what to do.

Not responding is the second worst thing you can do.  The bank (and court) will assume you’ve abandoned them and the process will run automatically to a sheriff’s sale.  In most cases, the bank does not want your home, especially if the value of the home is less than the outstanding mortgage balance.

The worst thing you can do is try to find a “white knight” to help you.  These are people who prey on the unfortunate situations of others.  You end up in worse shape then before their involvement and they end up richer at your expense.

NPR’s All Things Considered recently featured the latest scams to come forward in this industry:

As homeowners fall behind on their mortgage payments and face the prospect of foreclosure, con artists are also taking advantage of the mortgage crisis. Some of them are finding ways to cheat homeowners out of their deeds.

It was only a matter of time before scam artists would find new ways to swindle these desperate homeowners. The latest scheme is something called a Foreclosure Rescue.

The scheme preys upon people who are about to lose their homes — and will do almost anything to hang onto them.

One homeowner taken in by a con artist, Gloria Johnson, bought her house in the Bushwick section of Brooklyn in 2001. It was her first home, a three-story two-family affair with a nice yard in the back where she has put a swingset and some small plastic tables for the children who attend her daycare center.

Speaking in her backyard, Johnson said she is embarrassed about what happened to her. She doesn’t want to talk about how close she came to losing her house in front of her staff. It started when she feel two months behind in her mortgage payments and started to call around to see if a bank would help her refinance.

“Everyone was telling me no,” Johnson said, “because my credit wasn’t the best. And then this place said they could help me. I was running more on fear.”

The place that seemed to offer rescue was a company called Home Savers Consulting Corporation. Their advertisement in a local newspaper promised to save homeowners from foreclosure, fix their credit in a year, and even give them a little cash in the meantime.

Johnson visited an office to go over how Home Savers could help her, and filled out some paperwork.

“I was under the impression I was doing a loan application,” she said.

But the loan application was complicated. Gloria wondered why there were so many papers to sign. It seemed weird.

As she looked at the papers, Johnson said, the man “just kept saying, ‘Don’t worry, it will work out for you guys, you all are doing the right thing.’ He just kept talking so much, I think that’s why I kept getting a bad feeling.”

But since this was the only lender who seemed willing to help her refinance her home, Johnson didn’t feel she had much choice.

She signed the papers in spite of her misgivings and went home. She called Home Savers the next morning, saying she wanted out. When no one called her back, she opened the phone book and started calling lawyers.

“When I called the lawyer and explained the situation to the lawyer,” Johnson said, “the lawyer said, ‘Miss, I believe they have swindled you out of your house.’ And I was like, what?”

Johnson still gets teary-eyed talking about it. The lawyer was matter-of-fact. From her description of all the papers Johnson signed, it sounded like she hadn’t refinanced her home, but in fact had sold it.

Jessica Attie is one of the co-directors of the Foreclosure Prevention Project, a group based in Brooklyn. She was Gloria Johnson’s lawyer.

“What she had done unknowingly was transfer her home,” Attie said of Johnson, “to what we call a straw buyer. He paid off her mortgage of $240,000 and he got a new mortgage of $425,000.”

The straw buyers are an important part of the foreclosure rescue scam. They lend their identities and good credit to the operation and get a fee in return. The straw buyers never live in the house. Instead, the scammers ask homeowners to sign over the deed of their house for a year, while a “foreclosure consultant” helps them repair their credit.

The schemers promise the homeowners that they can live in their houses mortgage-free, and then buy their houses back after a year. What their victims don’t know is that the scammers work with straw buyers to take out a bigger mortgage that essentially cashes out any equity in the house.

“These cases are very difficult to undo,” Attie said, “because the people who get to take out the cash often disappear. You can’t find them you can’t find the money and the property is left encumbered by a huge mortgage.”

But the surprising part is that it isn’t your stereotypical con artist doing the scheming.

More often than not, it is a real estate professional — an aboveboard mortgage pro who might have been in the business honestly for years — but who saw a chance to make big money and took it.

“We’ve seen alot of them are people who used to work in mortgage companies,” Attie said. “I think it is so profitable because you can make hundreds of thousands of dollars with one deal. I even heard that they were giving seminars, teaching people how to do these scams at one point.”

FBI Assistant Director Mark Mershon, who oversees the New York bureau’s mortgage fraud investigations, agreed.

“It’s a mix,” Mershon said. “You have people who live their entire, so to speak, professional lives as con men or con persons — but we do have others who have crossed over, so to speak, to the dark side.”

Gloria Johnson’s story has one of the rare happy endings in this scenario.

When Attie filed suit against Home Savers they got scared, and sent Johnson back her money and the deed.

Then Attie talked to a legitimate bank and got them to refinance Gloria’s house, cutting her mortgage payments in half. Gloria, for her part, said she has learned her lesson. If you look in her savings account, there is always enough money to cover four months of mortgage payments.

If you find yourself in this situation and want to try mediation, give me a call at 732-963-2299 or contact me through my website. I am on the court roster of mediators for Superior Court in New Jersey.