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Thanks the Feds for Opening Doors to Mortgage Modification Scams

Sigh—I just heard another story of a mortgage modification scam.

This got me thinking: Why is it that when the government tries to solve one problem, it just creates another problem?

After falling over themselves to do something—anything!—to stave off foreclosures, politicians came up with mortgage modification programs and basically forced banks to modify loans for struggling homeowners by reducing interest rates and cutting payments.

Keep in mind, though, that the mortgage loan modifications are only for people who are already behind on their payment. If you are a responsible borrower who makes your payments, who abides by the contract you signed, and who makes prudent choices that allow you to live within your means, do you think you will qualify for a mortgage modification?

Slim chance.

The long and short of it is this: Mortgage modification programs overwhelmingly benefit the individuals who are not following the rules. Sure, their credit score might take a toll, but as I discuss in 7 Steps to a 720 Credit Score (Philip Tirone, 2008), they can increase their scores to 720 in just two short years!

Ultimately, it is simply unfair for the government to create loan modification programs that benefit the borrowers who fail to follow the rules by defaulting on their payments. This fosters an attitude in which morality is thrown out the window. Instead, people intentionally decide to stop making payments, thinking exactly what my clients tell me: If I stop making payments, I will be able to negotiate lower mortgage payments. But if I keep making payments, I won’t have a shot.

Perhaps more alarming is that the mortgage modification programs are not working. More than half of loans modified at the beginning of 2009 defaulted by year’s end, reported the federal government in March 2010. And foreclosures are also on the rise, even though many of these modified loans are only beginning to enter the foreclosure process. According to the online marketplace of foreclosure properties, RealtyTrac Inc., the number of homes foreclosed in the first quarter of 2010 jumped 35 percent from a year ago. And RealtyTrac’s aggregation of foreclosure data also shows that the number of households who are facing foreclosure grew 16 percent year-over-year and 7 percent in just one quarter.

In other words, these programs are just prolonging inevitable foreclosures and facts of bankruptcy.

We are bound to see many, many more foreclosures as the modification program continues to deteriorate.

So let’s summarize the mortgage modification program: It is unethical, and it is failing. And guess what? To make the problem worse, the government’s rush to create a “solution” opened the doors to all sorts of loan modification scams.

Lo and behold! Government intervention created more problems! Who woulda thunk it?

The systemic problem with government intervention is that it almost always creates more problems, and the mortgage modification program is no exception.

 “This has not been a well-defined program from day one,” said TARP special inspector general Neil Barofsky of the government’s mortgage modification program, citing a giant “uptick” in scams targeted at struggling homeowners.

“Criminals speed on that type of confusion,” he said of the mass confusion regarding the rules of the mortgage modification program. Some shysters pretend to be affiliated with a bank or government affiliate, then they charge outrageously high fees, only to disappear with the homeowner’s money.

It’s a big problem, and one that arguably could have been stopped. If only the government had refused to intervene. If only politicians had let the market set the fair value of homes and rejected the notion that everyone should be a homeowner. If only they had let banks act in their best interest. If only politicians allowed people to learn lessons, especially when homeowners knew the score before they signed up to play the game...

… then maybe we wouldn’t have all these mortgage modification scams.


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