Borrowing a page from the farming crisis of the 1980s–when farmers facing foreclosure and their leaders were forced to mediate their way out of trouble–Iowa unveiled a pilot project this week aimed doing something similar for homeowners facing foreclosure. Iowa’s “Mortgage Foreclosure Hotline Project” will work to help borrowers and lenders modify loan terms so homeowners can make payments–and keep their homes–and lenders can do better financially than if they foreclosed on a mortgage.

With Iowa’s subprime-related foreclosure rate hovering above 8.5 percent–fourth worst in the nation–anything is worth a shot!

As a result of the the new initiative, Iowans facing a mortgage foreclosure can now call a toll-free number (877-622-4866) staffed by the Iowa Mediation Service (IMS). IMS staff will take information from borrowers and then explore if a loan modification might work for both the borrower and lender.

The reality for homeowners facing foreclosure is that they may not even know who to talk to about their loans. Statistics show that about 50 percent of Iowa homeowners who lose their homes to foreclosure, never contacted their lender. In far too many instances, the entity that originated the loan is long gone. Most loans go to other companies and ultimately to investors who buy big batches of loans and leave the ’servicing’ up to other companies. Iowa’s Mortgage Foreclosure Hotline Project will work through the maze and help figure out exactly who needs to be contacted.

During the farming crisis of the 1980s, thousands of farm foreclosures in Iowa were avoided thanks to mandatory mediation. IMS conducted hundreds of successful mediations during that time, which sparked the idea for the state’s new Mortgage Foreclosure Hotline Project. (While formal mediation was compulsory for farm foreclosures in the 1980s, participation in the new project is entirely voluntary.)

Iowa’s Attorney General, Tom Miller, filed a lawsuit last Thursday alleging that two people committed consumer fraud and ongoing criminal conduct in the sale of homes in the Des Moines area. Miller’s office alleges that John J. Davis and Christine Frank repeatedly sold homes at highly-inflated prices to first-time buyers with average or below-average credit scores, and that they engaged in fraud to induce mortgage companies to make the loans.

Miller’s suit spells out nine cases of fraud victims who bought homes from Davis and Frank. All the loans cited ended in foreclosure, harming the buyers and their credit histories, and harming the mortgage companies because the value of the properties is substantially less than the respective loans.

In particular, the lawsuit alleges, Davis and Frank “repeatedly created documents to make it appear that the purchasers made sizeable down-payments, when in fact the purchasers had not done so.” The suit also alleges that the pair wired and transferred their own funds to the real estate closing agent, falsely representing that the funds were down payments from purchasers.

The suit goes on to spell out how appraisals of properties were significantly overstated. Linda Hintz, who now has surrendered her State of Iowa appraisal license, performed eight of nine appraisals cited in the lawsuit. Mark Wallace, who has been convicted of Theft in the First Degree and Forgery for activities related to other appraisals, completed the other.

The lawsuit alleged that the deception induced the mortgage company to make loans to buyers, and allowed the buyers to pay the defendants highly inflated prices for the properties.

Examples cited in the Lawsuit:

• In one case, a Des Moines property was appraised at $85,000 for a sale on March 30, 2003, even though the Polk County Assessor had placed a value of only $33,290 on the property just four months earlier, on January 1, 2003. Davis and Frank sold the property for $85,000, falsely representing that the buyers had paid a down payment of $13,000. The mortgage company made a loan of $72,250 to the buyers, and proceeds of $64,870.07 were wired to a Davis and Frank controlled account at the Earlham Savings Bank. Mortgage foreclosure proceedings have been initiated against the buyers.
• In another example, Davis and Frank sold another property for $115,000 on March 31, 2003. The property in question had been appraised at $115,000 by appraiser Linda Hintz, even though the Polk County Assessor had placed a fair market value of only $55,580 on the property just three months earlier, on January 1, 2003. The $7,000 down payment of was purportedly paid by the buyers, but was actually was paid by Davis and Frank, the suit contends. Proceeds of $69,893.89 were wired to a Davis and Frank account at the Earlham Savings Bank, and sadly, the buyers lost the property in foreclosure earlier this year.

In the nine examples cited, the suit alleges, misrepresentations by Davis and Frank induced mortgage companies to make loans totaling nearly $700,000, and all of the loans ended up in foreclosure.