A growing number of real estate professionals are putting their expertise in dealing with lenders to work in helping troubled borrowers avoid foreclosure by negotiating loan modifications or short sales.
But with regulators on the lookout for shady operators who make false claims about the foreclosure prevention services they provide, it’s important to stay abreast of rules that can vary by state.
In California, real estate brokers must enter into advance fee agreements with borrowers if they plan to collect fees upfront for the services they and their agents provide. Any fees collected in advance must be placed in a trust account that’s drawn upon when services are performed.
Before brokers can collect the fees, the California Department of Real Estate must sign off on the fee agreements and accounting practices they plan to use.
Brokers don’t need to go through the Department of Real Estate’s review process to negotiate loan modifications unless they’re collecting fees in advance. But given the uncertain finances of their clients, many prefer to do business that way. Nearly two dozen companies have obtained "no objection" letters from the department, allowing them to collect fees in advance to negotiate loan modifications and short sales with lenders (see list).
Some of those companies are also partnering with other brokers, allowing their licensed agents and brokers to earn a portion of the fees the companies collect in advance for providing such services.
Companies that aren’t aware of California’s rules governing advance collection of fees — or who simply ignore them — risk disciplinary action.
"We are finding folks ramping up for this business without meeting the requirements of the law," said Tom Pool, a spokesman for the Department of Real Estate. "If we come across a situation where a broker is collecting advance fees without meeting the standards, it’s quite possible they will be disciplined or have a cease and refrain order filed against them."
Pool said the bigger issue for consumers is that "a lot of companies have popped up that are not licensed. They are collecting fees without providing services, and that is a big issue for law enforcement."
This month, California Attorney General Jerry Brown announced the arrests of three people associated with First Gov, a foreclosure rescue company that allegedly charged troubled homeowners $1,500 to $5,000 in upfront fees and promised to help them renegotiate their mortgages. The company, operating as Foreclosure Prevention Services, instead told victims to stop making payments and communicating with their lender, prosecutors said.
In Illinois this week, Attorney General Lisa Madigan said she’d filed lawsuits against seven companies that collected upfront fees to negotiate with lenders, in violation of the state’s Mortgage Rescue Fraud Act. So far, Illinois has sued 22 companies for such violations.
Counseling for homeowners who are behind in their mortgage payments or already in foreclosure is available at little or no cost. The Homeownership Preservation Foundation, for example, operates a hotline at (888) 995-4673 that provides access to U.S. Housing and Urban Development Department-approved counselors who can evaluate a borrower’s current situation and recommend options for avoiding foreclosure.
But for some borrowers, handling negotiations with their lender themselves or with a counselor’s help can be a frustrating, intimidating and ultimately fruitless exercise.
Why pay?
Many companies that charge borrowers to help homeowners negotiate loan modifications or short sales say they are providing a legitimate service. The companies say they know the ins and outs of many lenders’ loss mitigation policies, and have the ability, experience and determination to negotiate the best possible outcome for clients. If they don’t get results, some offer to refund part or all of their fees.
The average homeowner may have trouble finding the right person to talk to and keeping the loan modification process on track.
"The first call we make to (the loan servicer) is clear and decisive," said Michelle Hood, vice president of Guardianship Real Estate Services in Redlands, Calif. "We say, ‘I need this department, and I need you to do this and this and this for the client."
Guardianship charges a flat fee of $3,000 — $1,600 upfront, and an additional $1,400 when clients are "100 percent satisfied" and the case is closed, Hood said. Company president Karin Blad has a real estate agent under her who also works with troubled homeowners, but Blad handles most of the workload, Hood said.
In California, licensed real estate brokers can list and sell real estate, and also negotiate loans secured by real estate. Apart from brokers and their licensed employees, only attorneys are authorized to negotiate with lenders. Both Hood and Blad originate loans.
"You could go and do these mods yourself, and spend the time on the phone all day like Karin does," Hood said. But the files are "very thick," and dealing with the sometimes contradictory direction from loan servicers requires dedication and knowledge, she said.
"I’ve heard Karin get into arguments with the lenders — they can be really rude about what you’re trying to accomplish," Hood said. "I don’t work on my car, I take it to a mechanic. And I don’t go into court without a lawyer. We make sure we are taking care of our clients."
One reason so many companies have sprung up to provide such services for a fee is because nonprofits that provide counseling are understaffed, and lenders could take advantage of borrowers who are offered loan modifications, said Robert Aldana, a Realtor who is also president of San Jose-based Home Resolution & Credit Services Inc.
"Lenders are telling people not to pay somebody to do this, because (some lenders) are giving crappy terms" on loan modifications, Aldana said. When HRCS’s team of negotiators talks to lenders, he said, "we know where we are going and what we want to get" for clients.
HRCS has talked to "thousands" of troubled borrowers, Aldana said, and a staff of about 25 processors and negotiators are now handling about 300 loan modification cases for clients, who pay the company $2,500 upfront.
"We have so many deals in the pipeline," Aldana said. "We are getting amazing results — 2 percent fixed-rate loans, lenders forgiving debt for five years, or saying don’t pay anything until you sell."
Aldana, who hosts an hourlong local real estate radio show that airs every weekday, said he got into the business of negotiating loan modifications because his listeners were frustrated with the results they were getting on their own or with the help of free housing counselors.
"I’d send them to (the) HOPE Now hotline or tell them to work with their lenders, and they’d call me back three or four months later and say ‘Nobody ever called me back,’ " Aldana said.
When homeowners are able to make contact with lenders or their loan servicers, the treatment they receive can be appalling, he added.
"When you call them, they treat you like garbage," Aldana said. "They say, ‘Who do you think you are? You’re freeloading — we’re going to kick you out of your house.’ "
His initial attempt to provide free help to borrowers on a case-by-case basis "was the biggest mistake I ever made," Aldana said. Negotiating a loan modification takes about 15 hours, on average, he said, and the demand is overwhelming.
So HRCS’s broker of record, Martha Lopez Chubb, jumped through the hoops at the Department of Real Estate so her firm could collect fees in advance. About three months after applying, Lopez Chubb became the first broker in California to obtain the "no objection" letter governing her advance fee agreement and accounting practices.
As of this week, 21 brokers had completed the state’s review process, and "there are many more in the queue," said department spokesman Pool. "If you watch that list, it’s going to continue to grow."
Review process
The Department of Real Estate is careful to state that it does not "approve, endorse, recommend or make any representations" about the companies using advance-fee agreements or their terms or any aspect of a licensee’s business activities." The department advises consumers to review the agreements and consider comparing services and fees offered by other licensed brokers.
Aldana said the state’s review was thorough, but he doesn’t begrudge the process. In 22 years in real estate, "I’ve never been so under the (regulatory) microscope as I am today," he said.
"I think it’s justified, because so many people are getting ripped off" by unscrupulous foreclosure rescue scams, Aldana said. "I’ve had people come to me and show me the receipts showing they paid $9,000, or $14,000 (for help dealing with lenders), and still lost their house. The people never returned their calls."
Hood also found that obtaining the "no objection" letter from the Department of Real Estate wasn’t easy. Getting the wording of the agreement right can be tricky.
"If they don’t like a word or a phrase, they will send it back to you," Hood said of the fee agreement every broker must use in order to collect fees in advance. "I think they sent it back three times."
The process was so difficult, Hood said she and Blad suspect other brokers of trying to obtain copies of Guardianship’s advance fee agreement under false pretenses, so they can crib from it.
Darren DiMarco, president of San Clemente, Calif.-based Fortune Bancorp, said his company also had to go through several revisions of its advanced fee agreement before the Department of Real Estate would sign off on it.
Now that the department has placed more information on its Web site about what regulators are looking for — including the "essential elements" of an advanced fee agreement — the process has become easier, DiMarco said.
In theory, any licensed broker can obtain approval to collect fees in advance for negotiating loan modifications. But the bookkeeping requirements and other expenses of offering such a service are also potential obstacles.
The Department of Real Estate requires that all fees collected from clients in advance go into a trust account. Anytime money goes in or out of the accounts, that has to be reported to the client, and brokers must also provide annual reports to the Department of Real Estate, DiMarco said.
"That alone would make a broker think twice about handling the client’s money directly," DiMarco said.
Forming partnerships
Like HRCS and Guardianship, Fortune Bancorp is pursuing partnerships with other mortgage and real estate brokers that allow their licensed brokers and agents to provide the company’s loan modification service under the Credit Angel umbrella.
"We’ve looking for people who understand something about the real estate process or the loan process," DiMarco said. The company does a background check of anyone it works with to make sure they treat clients ethically and legally. "Anyone we’d contract with as a service provider is also required to go through our training."
By law, a broker or agent must do more than provide a referral to earn a portion of the advance fees collected for negotiating loan modifications. To be compensated, Fortune Bancorp requires that brokers and agents interview borrowers to obtain their financial information, review the details of their mortgage, help borrowers compose a "hardship letter" and financial statement, and consult with borrowers on the result of the initial analysis and research.
According to a PowerPoint presentation Fortune Bancorp provides to prospective broker partners, Credit Angel clients pay a $2,850 flat fee, and brokers who bring in loan modification case packages get $1,250 — 60 percent upfront and 40 percent when they close a case.
DiMarco said compensation for partnering brokers can vary depending on how successful they are in negotiating a loan modification. Credit Angel uses a three-step process in which the client can receive a 100 percent refund if they cancel in the first stage.
If Credit Angel clients cancel before a loan modification package is submitted to the lender at the end of stage two, they get about 75 percent of the fee back, DiMarco said. After a package is submitted to the lender, about 45 percent of the fee remains in the trust account until an option is approved by the lender.
Hood said Guardianship offers a full money-back guarantee.
"We could do all the work, and give all the money back in the end," Hood said. "Like any other loan officer, we don’t get paid if we don’t close" a loan modification.
She said Guardianship is considering partnering with other brokers to allow them to provide counseling to borrowers seeking loan modifications using the company’s approved process. Under such partnerships, Guardianship would take a $1,400 cut, with the cooperating broker receiving $1,600 if they were able to provide services to the client’s satisfaction.
Aldana said that while HRCS is under no obligation to provide refunds for work it has performed for clients, he said he has offered refunds on two or three occasions "because it’s good business."
The Department of Real Estate prohibits brokers who negotiate loan modifications from collecting fees in advance from any borrower who has already been subject to a notice of default. So HRCS will negotiate loan modifications for such clients free of charge, he said.
"I would guess 30 or 40 percent of our work is probably done for free, not for profit," Aldana said. "Without sounding like some saint, because I’m not, my heart tells me I have to help these people."
HRCS, Fortune Bancorp and other brokers who negotiate loan modifications will also help Realtors negotiate with banks on short sales.
For agents not experienced in dealing with lenders, handling short-sale negotiations means taking time away from other listings, DiMarco said. "You can waste a lot of time," he warned. An agent’s inexperience "prolongs a process that can move along very quickly if you know what you’re doing."
But with some markets now flooded with foreclosed properties and the government and loan servicers rolling out streamlined loan modification procedures, some homeowners may be better off with a loan mod than a short sale, DiMarco said.
"If it turns out the homeowner is more interested in doing a loan modification, the agent can still provide a service and be compensated for that," by taking part in the negotiations, DiMarco said. For those who are willing to put in the work, "There is very good compensation, and this business is exploding."
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