For Darrell Sa'lley, the past two years have been a case of bad to worse. After being diagnosed with cancer, the Virginia Beach (Va.) resident underwent two surgeries that put him out of work for more than a year—and months behind on his mortgage. Fearful he would lose his home, Sa'lley perked up when he heard a spot on a Christian radio station from a local firm, D&D Home Loans Corp., promising to help homeowners facing foreclosure and other financial crises. "All of the things that the ad was offering I really needed," the 37-year-old recalls.
After meeting with D&D owner W. Michael Robinson, who quoted from Scripture during the visit, Sa'lley signed a stack of documents for what he thought was an advance loan on a refinancing that Robinson had arranged with a private investor. Sa'lley now says he unwittingly signed over the deed to his home to Robinson's stepson, giving him claim to the $230,000 in equity Sa'lley had built up over the years. "I felt as if the world had opened up and I was devoured," says Sa'lley, one of three D&D clients who has filed a civil suit against the company. Robinson says he had no financial interest in the deal and contends his stepson only took the deed after Sa'lley was unable to repay the advance. "I was more like a white knight who stepped up to assist someone, and now I'm being smeared," says Robinson, whose stepson has since given ownership of the home back to Sa'lley.
Situations like Sa'lley's are increasingly common. With the housing bust in full force and millions of homeowners facing foreclosure, the sketchier side of the real estate industry is coming into view. Although there are plenty of legitimate, mostly nonprofit, operations that help distressed homeowners, there's also a growing army of deceptive outfits that prey on and profit from this troubled group. While statistics on these schemes are hard to come by, law enforcement authorities confirm that foreclosure scams are rising sharply—so sharply that more than 10 states have recently enacted laws aimed at protecting homeowners.
MILLIONS OF TARGETS
In most states, it's not illegal for one person to persuade another to sign his or her home over. And proving it was done through deceptive means can be tricky if the promises to help the owner were made verbally, as is often the case. So many victims have little recourse except through civil proceedings. But with the number of foreclosures estimated to soar to more than 2 million over the next couple of years, more and more policymakers are scrambling to keep the situation from turning into an epidemic by enacting tougher penalties for such practices. Massachusetts Governor Deval Patrick, a Democrat, filed legislation on June 11 that would criminalize abusive "foreclosure rescue" schemes. "In the coming months we're going to see a growing population that can be preyed upon by these schemes," says Massachusetts Attorney General Martha Coakley, who on June 1 added emergency provisions to the state's consumer laws to prohibit foreclosure rescues in which the so-called rescuer profits from the transaction.
While the schemes vary in their mechanics, all follow a similar pattern. An individual or group, in the guise of helping a homeowner avoid losing his or her house, persuades the owner to transfer the title to the rescuer or another designated buyer. The practice has become easier with the rise of Web sites like PreForeclosure.com and All-foreclosure.com, which give subscribers listings as soon as mortgage lenders file a "notice of trustee sale" with the courts, the first step in the foreclosure process. Such sites, which compile public records to provide legitimate leads for investors in distressed properties, as well as services for homeowners, also give unscrupulous individuals direct access to potential targets.
BIRD DOGS CHASING EQUITY
Within days of showing up on such lists, desperate homeowners are beset by hordes of supposed white knights. Melissa A. Huelsman, a Seattle attorney specializing in bankruptcies and foreclosures, says that over the three months it typically takes a lender to foreclose, some of her clients receive as many as 20 calls or letters daily from firms promising to help them keep their houses. The outfits are sophisticated, carefully targeting owners whom the tax records show have been in their homes for years, a sign they may be sitting on a nice chunk of equity. "They know better than to go after homes refinanced or purchased last year [with subprime loans], because chances are it was a 100% loan and there's no equity to strip out," says Atlanta attorney Michael P. Froman.
Most commonly, the rescuers then coordinate what they say is a refinancing through a designated investor, or they arrange a deed transfer with a rent-to-own plan that will supposedly allow the owners to buy back their homes down the road. But usually buried within the stack of closing documents is a so-called quit claim, or deed of gift, in which the homeowners effectively sign their houses over to the investor. At that point, the rescuers charge the former owners rent high enough to ensure they can evict them and pocket the equity built up in the property.
Some of these operations are quite complex. A number of firms recruit staff through real estate seminars or late-night TV infomercials to work either as "door knockers," who pay visits to distressed homeowners, or as "bird dogs," who serve as fake buyers. Take Real Estate Investor's Advantage (REIA), a Fort Washington (Md.) outfit run by Nathaniel X. Arnold that filed for bankruptcy and shut its doors last year. The firm's Web site advertised seminars in which attendees paid $1,995 to become a "credit partner" in its "Real Estate Exchange & Profit System." In the pitch, REIA sought out individuals with good credit to be both door knockers and bird dogs in these transactions. In return, they would be paid a flat fee or a cut of the profits. (Arnold's attorney did not return multiple calls from BusinessWeek.)
One of REIA's credit partners, Joe Napolitano, knocked on Robert and Ruth Bowie's front door two years ago when Ruth was on the phone trying to negotiate a payment plan with their lender. The semi-retired couple was in jeopardy of losing their three-bedroom ranch house in Laytonsville, Md., which they bought in 1971. After several refinancings, their payments had ballooned to $2,800 on a $375,000 mortgage, and medical problems put the Bowies four months behind. While they were initially skeptical of Napolitano's offer to buy the house for $475,000 on behalf of Foreclosure Solutions Group, also controlled by REIA's Arnold, they thought the rent-to-own plan was the only way to save their home. So the Bowies consented to the sale. "They told us the house would be back in our name in six months," says Ruth Bowie.
It didn't work out that way. Instead, under the direction of FSG, Napolitano and his son-in-law took out a first and second mortgage totaling $475,000; after paying off the Bowie's outstanding loan of $364,000, FSG allegedly pocketed the remaining $101,000 in proceeds. The Bowies were shocked to discover at the closing that their rent, as part of "lease-back" agreement, would be $3,600. Although Napolitano's lawyer, Alexander Gordon IV, says his client made $5,000 to $15,000, he argues that Napolitano was scammed by Arnold's outfit, since he was left holding the mortgage. "He understood that he was keeping people from being homeless," Gordon says.
Meanwhile, the Bowies have fought back, filing a civil suit in the Circuit Court for Montgomery County, Md., last year. A circuit court judge in October ordered FSG to pay $3.9 million to the Bowies for emotional distress, money they are unlikely to see because of the firm's bankruptcy. Arnold denies in court filings that his program violated Maryland's "foreclosure protection" laws, an issue that will be decided at trial. The Bowies, who still live in the home and hope to one day own it again, are now paying $2,600 a month as part of a temporary settlement, in which Napolitano forks over an additional $1,200. Says Robert Bowie: "This boy ain't going to make this mistake again."
With Brian Grow in Atlanta and Coleman Cowan in Laytonsville, Md.