According to the Associated Press, 8,000 Ukrainians demonstrated yesterday in that country’s capital demanding an investigation into a massive real estate fraud scheme:

Thousands of Ukrainians bought new apartments in Kyiv that were secretly being sold to multiple buyers and never completed. Police have estimated that some 1,500 people might have fallen victim to the scam, losing an equivalent of US$79 million (-67 million). The owners of the company accused of fraud, Elita-Tsentr, have fled the country and have been put on the international wanted list, Ukrainian media reported.

Protesters gathered outside the Kyiv city council. In February, President Viktor Yushchenko ordered his government to help sort out the scandal. The scam occurred as real estate prices in the Ukrainian capital shot up, leaving many buyers desperate for a deal. Buyers were offered lower prices if they purchased yet-unbuilt apartments.

Problems emerged earlier this year when buyers discovered that their apartments had been sold to others and that construction was behind schedule.

While police estimate that 1,500 people fell victim to the scam, nearly five-times that many (a whopping 8,000 citizens) participated in yesterday’s demonstration. Imagine if four to five of your closest friends and neighbors chose to stand by your side to protest crimes committed against you and your family here in the U.S. Talk about community support. If we had that sort of a citizenry here, we’d be able to wipe out real estate and mortgage fraud literally overnight. Neighbors would be looking out for one another in ways we’ve never seen before, while the fraudsters, scammers, and bad guys would be identified, prosecuted and publicly humiliated.

Anyone want to rally?

A number of people and organizations are weighing in on Illinois Senate Bill 2349, the state’s proposed ‘Mortgage Rescue’ Fraud Prevention Act. Here’s an overview of the proposed legislation, followed by links to commentary:

BACKGROUND: Due to the explosive growth of predatory mortgage
lending, home foreclosures are on the rise in Illinois, as they are in many other parts of the United States. According to the National Training and Information Center, mortgage foreclosure filings in Cook County, Illinois, jumped from 8,006 to 17,248 between 1996 and 2002. After dropping slightly in 2003 and 2004, filings were projected to hit a record high of 17,600 in 2005.

The self-styled “mortgage rescue” industry has grown in direct proportion to the number of homes that are at risk of foreclosure. Although ‘mortgage rescuers’ promise to save the homes of financially distressed homeowners, backers of the Illinois’ measure say they all too often add insult to injury, either by charging exorbitant fees for services never rendered or by stripping the equity from properties and leaving homeowners with nothing in return.

HOW DO ‘MORTGAGE RESCUE’ SCHEMES WORK?

Here are two of the most common ‘mortgage rescue’ schemes:

1. Distressed property consultants offer phantom help to homeowners in distress, typically promising to “buy them time” or “save the home” by negotiating with the homeowners’ creditors. In exchange for a fee that ranges from $1,000 to $2,500, the distressed property consultant does little or nothing, and essentially abandons the homeowner to a fate that might have been prevented with professional intervention.

2. Distressed property purchasers lead homeowners to sign over the deed to their property by telling them they can stay in their home and pay rent until they get back on their feet financially. Many homeowners do not realize they are selling their home to the “rescuer,” and most receive no financial benefit from the transaction, even when their equity in the property is greater than what they owe. Commonly, the homeowners’ rental payments are much higher than their mortgage payments. Using a variety of devices, the “rescuer” ultimately strips the home of its equity, often by selling it to a third party, and the homeowner ends up facing eviction.

WHAT WILL SENATE BILL 2349 DO?

Illinois’ ‘Mortgage Rescue’ Fraud Prevention Act will provide protections to homeowners under when dealing both with consultants and purchasers. Here’s how:

Distressed Property Consultant Protections

1. Distressed property consultants must provide homeowners with a written contract listing all services.

2. The consultant contract must contain a right to cancel at any time.
3. The consultant cannot receive any compensation until all services have been performed.

Distressed Property Purchaser Protections

1. Distressed property purchasers must provide homeowners with a written contract that lists the terms of the sale and makes it clear that the home is actually being sold.

2. The homeowner has the right to cancel the sales contract for five business days after it is signed.
3. Prior to sale, the purchaser must make a determination that the homeowner has the ability to make rental payments and to buy the home back.
4. The purchaser must pay the homeowner at least 82% of the fair market value of the home.
5. A homeowner who remains in the home under a rental agreement has the right to cancel the rental agreement at any time.
6. The purchaser must record the purchase contract with the county recorder of deeds, so that any subsequent purchaser is put on notice.
7. A violation of this Act is a violation of the Consumer Fraud Act. Distressed property purchasers in violation of the Act are subject to criminal penalties as well.

WHO’S COMMENTING ON THE PROPOSED LEGISLATION?

Illinois State Senator Jacqueline Y. Collins (D-Chicago): “These individuals claiming to be rescuers generally are not that at all. Often times they are preying on the most vulnerable targets they can find, and unfortunately those people frequently happen to be from low-income households. This is a practice that has to be stopped to save our communities.”

Since similar legislation is expected to hit lawmakers dockets in Texas, HoustonRealNews.com is weighing in.

And finally, the National Association of Responsible Home Rebuilders and Investors (NARHRI)–an association of individual home re-builders, investors, businesses, and related professionals dedicated what they call the improvement of the legislative and regulatory atmosphere governing the home re-building and investing industry is weighing in as well. Click here for NARHRI’s opinion.

The co-chair of the Mortgage Bankers Association of America’s (MBA) Legal Issues Sub-committee on Fraud says real estate fraud is likely to increase as the mortgage market continues to shrink. According to Arthur Prieston, housing values are dropping by approximately 9 percent in some parts of the country, while defaults on home loans are rising by as much as 22 percent. Prieston says that as lenders are increasingly dealing with harder loans to secure and less qualified borrowers, requests for exceptions to loan guidelines have increased, as have the number of suspected misrepresentations on home loan applications by consumers.

The bottom line… as the market contracts and margins thin, lenders are under more and more pressure to accept chancy loans. In response to the need to keep loan volumes up, mortgage lenders are increasingly tempted to not look too closely at loans, and the fraudsters understand this all too well… as they always have, the bad guys will continue to try to take advantage of the situation by pushing through loans containing material misrepresentations about employment, income, and the very reasons for securing their loans in the first place.

I agree with Prieston’s assessment, and he’s right… the mortgage industry must remain vigilant in the fight against fraud, even as loan volumes decrease!