Rescuing the Rescued: Stemming the Tide of Foreclosure Rescue Scams in Washington
| Publication year | 2007 |
I. Introduction
As interest rates rise, adjustable-rate mortgage payments swell, and consumer debt grows, many Washington homeowners find themselves being pushed toward the brink of foreclosure.(fn1) At the same time, however, the booming housing market of recent years has led to home price appreciation that has greatly outpaced inflation.(fn2) Financially distressed homeowners may not realize that the spike in home values has created substantial home equity in their properties.(fn3) This confluence of financial distress and rising home values has created a nationwide epidemic of a type of mortgage fraud known as the foreclosure rescue scam (FRS)(fn4) A typical FRS involves the conveyance of a homeowner's property to a "rescuer" who promises to save the home from foreclosure, coupled with a lease-option agreement that makes the homeowner a tenant in the home he or she previously owned. This purported transactional "rescue" is soon followed by the former homeowner's eviction by the "rescuer." The former homeowner is left homeless; the "rescuer" walks away with the property's equity.(fn5) "Rescuers," or foreclosure rescue scam artists (FRSAs),(fn6) target stressed homeowners who are on the brink of losing their homes.(fn7) Moreover, they focus on those who can least afford to be scammed: elderly and low-income homeowners.(fn8)
FRSAs easily identify distressed homeowners by monitoring recorded notices of default on government websites(fn9) or by subscribing to a private service that compiles lists of such notices.(fn10) Homeowners in default soon find themselves inundated by offers of help from FRSAs,(fn11) who try to create a personal connection with homeowners through phone calls and personal visits.(fn12) They promise a chance to start over but warn the homeowner that he or she must act quickly to save his or her home and must not contact a lawyer or the mortgage lender.(fn13) FRSAs promise to pay off the amount owed by the homeowner in return for the conveyance of the property; they then structure a lease-buyback arrangement that sets the scam victim up to fail.(fn14) At some point, the former owner inevitably misses an unaffordable rent payment and is unceremoniously evicted from the home he or she once owned.(fn15) Thus, the scam is complete: The FRSA keeps the home and its equity.(fn16) Part II of this Comment will further explore the intricacies of how this scam is accomplished.
While FRS victims have many remedies under existing statutes, these remedies are inadequate because they fail to holistically address the FRS problem. A successful statutory approach to combating the spread of this insidious scam must rest on three legs: education, enforcement, and litigation. First, homeowners facing foreclosure need timely warnings regarding the existence and prevalence of the FRS before the onslaught of FRSA solicitations begins. Next, in addition to education, homeowners need effective enforcement of the statutes that are supposed to protect them. Finally, homeowners wronged by FRSAs need to be able to seek civil relief that both adequately compensates them for their losses and provides incentives to attorneys willing to represent them in these complex, time-consuming cases.
By making only minor amendments to existing statutes, the Washington legislature could accomplish all three goals, thereby significantly strengthening protections for financially distressed homeowners. Therefore, focusing on the State of Washington,(fn17) this Comment recommends amendments to the Equity Skimming Act (ESA),(fn18) Deeds of Trust Act,(fn19) Mortgage Lending Fraud Prosecution Account Act,(fn20) and the Consumer Protection Act (CPA).(fn21)
To fully illustrate the problem, Part II will examine the structure of a typical FRS and provide a case study of an actual FRS that took place in King County. Part III will then survey the range of statutory, common law, and equitable remedies available to FRS victims in Washington. Finally, Part IV recommends four state statutory amendments that will eliminate loopholes, strengthen enforcement, and educate potential victims.
II. Background
Homeowners become potential FRS victims when they default on their mortgage payments, leading to foreclosure under the Deeds of Trust Act.(fn22) This Act requires that a notice of the forthcoming foreclosure sale be sent to the homeowner.(fn23) Currently, only a notice of the foreclosure sale is required by the statute, even though this early contact with distressed homeowners offers a valuable opportunity to educate them about the existence and danger of FRSAs.(fn24)
Upon learning of the pending foreclosure sale, the FRSAs begin to circle. Their aim is to obtain a substantial portion of a defaulting homeowner's equity without providing a material benefit in return.(fn25) To accomplish this, an FRSA first convinces the homeowner that he or she will prevent the foreclosure for a reasonable fee.(fn26) After obtaining the homeowner's trust by paying repeated visits and establishing a personal relationship, the FRSA purchases the house from the homeowner for a very low price, pays off the homeowner's mortgage debt, leases the home back to the homeowner for a year or two at an unaffordable rate, and gives the homeowner a repurchase option that he or she will be unable to exercise.(fn27) To complete the scam and abscond with the homeowner's equity, the FRSA simply sells the property for its fair market value after evicting the homeowner either for nonpayment of rent or because the lease has expired.(fn28)
Often, the FRS is complicated by the presence of a third-party "investor," who is commonly an accomplice of the FRSA.(fn29) In this version of the scam, FRSAs act as middlemen between the homeowner and the investor.(fn30) In return for their "services," FRSAs may collect fees from the homeowner for handling the transaction, split the homeowner's equity with the investor after the property has been resold, or both.(fn31)
An FRS necessarily involves a substantial amount of deceit, trickery, and exploitation,(fn32) making the elderly and those with cognitive disabilities especially susceptible.(fn33) FRSAs commonly use the following tactics to defraud their victims: (1) making promises to the homeowner but subsequently omitting them in the final documents; (2) having the homeowner sign incomplete documents and subsequently filling in the terms; (3) delaying the signing until the last moment before the foreclosure sale, thereby depriving the homeowner of better options and forcing him or her to sign whatever documents the FRSA presents; (4) charging excessive fees; and/or (5) failing to disclose material information about the proposed transactions.(fn34) In addition, some FRSAs employ a method known as "affinity marketing," in which they attempt to gain the victim's trust by demonstrating commonalities with the victim and persuading him or her that they are on the same side.(fn35) A Spanish-speaking FRSA, for example, might exclusively target Spanish-speaking homeowners.(fn36)
The case study presented next provides an excellent example of a FRSA gaining the trust of the victim by demonstrating a commonality of personal issues.
Amy Jones was a single woman in her fifties, living solely on disability income and acting as the sole caregiver for her adult son, who was severely mentally ill.(fn37) In the spring of 2001, Amy was unemployed and fell behind in the mortgage payments for the home she shared with her son. In March, a notice of trustee's sale was issued, stating that the house would be sold at public auction in June unless $6,290, the amount in arrears, was paid by June 18.
The June deadline passed. Shortly before the home was to be auctioned off, Rick Coburn, a broker at a well-known real estate company, appeared unsolicited at Amy's doorstep. Coburn told her that he knew her property was going to be auctioned. He gave her his business card and told her that he and his friend, the president of a mortgage company, were experienced in foreclosure matters and could help save her home. Coburn emphasized that he had helped many people in her situation. Amy declined his help, stating that she planned on delaying the sale by filing for bankruptcy the next day. Coburn departed, but not before ominously warning her that bankruptcy would not save her house or the equity she had accumulated.(fn38)
The very next day, Coburn's accomplice came to Amy's house. He introduced himself as Jim Rogers, the president of Coburn's mortgage company, and gave her his business card, which contained the slogan, "Providing Financial Solutions for a Brighter Tomorrow." Rogers reiterated that he could help save Amy's home, and he asked if he could come inside to discuss the matter. She declined, stating that she had just filed for bankruptcy that morning. Not one to be rebuffed, Rogers remained on the porch and began confiding to her about his personal life. Specifically, he discussed his difficult childhood and alcoholic father. Amy, in turn, opened up and told Rogers about her son's mental illness and her own struggles with depression.
Amy's bankruptcy petition caused the...
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