The Newest Mortgage Scam: Forensic Audits

Antonio Ocegueda and his wife Ines have a lot wrapped up in their house, a beige ranch in Union City, California. Antonio supervises a commercial landscaping company; over forty percent of his income every month goes toward pay off the $370,000 mortgage. His wife stays home to provide 24-hour care to their daughter, who has Down Syndrome.

In 2009, the Oceguedas wanted to modify their mortgage, looking for a lower interest rate so they could pay the loan off faster. Antonio heard an interview on a Spanish-language radio show with a local real estate broker who promised successful, risk-free modifications.

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The broker said he worked with lawyers who “were really good” at forcing banks to modify mortgages.

In a meeting with the broker’s staff, the Oceguedas signed a contract agreeing to pay Ken Nathanson, a Beverly Hills-based lawyer, $3,995. Nathanson advertises a service he calls a “forensic audit,” which involves looking for mistakes and misleading statements in mortgage documents that could enable homeowners to sue their lenders and win loan modifications.

Nathanson took nearly $4,000 from the Oceguedas, but never did anything to help them, according to a class-action lawsuit filed in June. Nathanson did not respond to a phone call seeking comment.

“The term ‘forensic audit’ is fake,” says James Zahradka, supervising attorney for the Law Foundation of Silicon Valley, a nonprofit group that is bringing the suit.

At Credit.com, we’ve been writing about mortgage modification scams for a while. Forensic audits appear to be the latest version, according to the Federal Trade Commission.

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“The ‘auditors’ say you can use the audit report to avoid foreclosure, accelerate the loan modification process, reduce your loan principal, or even cancel your loan,” the FTC says in a recent warning to consumers. “Nothing could be further from the truth.”

Like all good lies, a forensic audit scam is rooted in a kernel of truth. The Law Foundation of Silicon Valley has actually been doing a very similar process for years, Zahradka says. During the mortgage boom, many unscrupulous lenders and brokers boosted their incomes by lying to home buyers about the terms, and packing the loans full of high hidden fees and interest rates, says Zahrada.

After interviews with the homeowner and a careful review of the loan documents, an experienced attorney may be able to find places where these misrepresentations broke the law. In some such cases, the homeowner may be able to negotiate, or even sue, to get the loan rewritten with more favorable terms. The difference between legitimate document reviews and forensic audit scams is that the scammers charge up front. And they don’t do a whole lot in return.

In this way the forensic audit scam “besmirches the whole practice, which has very legitimate applications,” says Zahrada.

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The Newest Mortgage Scam: Forensic Audits (cont.) »

Image: Tall Chris, via Flickr.com

Of course, scammers aren’t concerned about such niceties. Their pitch is straightforward, the FTC says. In return for an upfront payment of between $2,000 and $5,000, the person promises to review victims’ loan documents, looking for errors. When they find one, they promise to demand a modification from the loan’s servicer. If the servicer declines, the lawyers say they will sue.

But in most cases, homeowners hand over their financial documents and thousands of dollars, and nothing happens.

“In fact these bad guys have no means or intent to assist the homeowner,” says Douglas Robinson, spokesman for NeighborWorks America, a government-supported nonprofit group that assists affordable housing efforts. “They’re just looking to grab a fee for a service that is never rendered.”

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Judy Jones works the box office at a sports arena in downtown San Jose, and 75 percent of her income goes toward paying off the mortgage on her home. She agreed to pay $3,995 to Ken Nathanson and RewireMyLoan.com, which Zahradka’s lawsuit describes as a shell company created to find and funnel potential victims to Nathanson’s law firm.

Nathanson’s employees promised Jones that her mortgage modification would take 45 to 90 days. Instead, they strung her along for 15 months, according to the suit, demanding more documents, promising to be in touch, and then ignoring her calls and emails.

In the end, Jones was left with her monstrously unaffordable mortgage, and she was out nearly $4,000.

“What we see is that the homeowner is in distress, these bad guys give them very official-looking documents that appear to offer a real solution, and the homeowner says ‘OK, let’s try it.'”

The lawsuit filed by the Law Foundation of Silicon Valley seeks to represent a larger class of people—such as Jones and Ocegueda—by Nathanson’s alleged scam. It seeks to recoup damages, plus legal fees and any punitive damages the court may see fit to impose. The suit was filed in Santa Clara County, and the defendants have yet to respond, which means there won’t be any results for quite some time, Zahrada says.

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There are many ways to tell whether an offer for a forensic audit is a scam. Perhaps the best rule of thumb is the simplest: ANY such offer is probably a scam, Zahrada says.

Why? It’s a simple question of math. Most laws regarding truth-in-lending violations have a three-year statute of limitations, Zahrada says. Given that the vast majority of problematic mortgages were written before 2008, and that very few mortgages have been sold in the years since, that means most homeowners are stuck with the loans they’ve already got.

“My view is that it’s pretty rare to find anything now that you can use to sue within the statute of limitations,” Zahrada says. “Most issues we could raise now would get thrown out immediately of court.”

Still, because some forensic audits may yet turn up evidence of deception and fraud in the mortgage process, one cannot write off the process entirely. Again, another indication of a probable scam is whether the person offering the service demands payment upfront.

“Don’t pay or anything until you get results,” Robinson says.

Another warning sign: Many scammers instruct victims not to contact their mortgage servicer, lender or financial planner, the FTC says. That’s because those professionals know about mortgage scams, and any mention of a forensic audit is sure to set off their warning bells.

If you’ve received an offer for a forensic audit, or any other kind of mortgage assistance, there’s an easy way to check and see if it’s legitimate. On its web site, NeighborWorks runs a listing of accredited mortgage counselors across the country. If the offer you receive is a scam but you still need help, those counselors may be able to point you in the right direction.

They’ll probably wind up giving the same advice that you’ve heard over and over: “If it’s too good to be true, it probably is,” Robinson says.

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