By Lingling Wei

From The Wall Street Journal Online

As the number of foreclosures rises, homeowners unable to make their mortgage payments are facing another growing threat: “foreclosure rescue” scams.

State and federal authorities say they are investigating an increasing number of homeowner complaints about fraud and deception by companies that engage in lending to financially distressed borrowers seeking to avoid foreclosure. Several states have recently passed or are contemplating new laws to provide more protection against dishonest businesses trying to take advantage of already vulnerable homeowners.

The problem centers on foreclosure-rescue companies, which target homeowners behind on their mortgage payments through newspaper ads or fliers claiming services such as “fast cash,” “equity funding” and “no credit check.” According to some recent cases filed by consumers and regulators, the companies mislead borrowers into believing they can save their homes from foreclosure in exchange for a transfer of the title for a year or two. The companies promise borrowers they can stay in their homes by paying rent for that period, giving them time to catch up financially until they can buy back their property. Often unknown to the borrowers, however, the companies may have sold their homes to a third party, stripping out the home equity and leaving the borrowers on the verge of eviction.

“More and more, we’re seeing some real sharks, pretending to be the homeowner’s best friend, but what they are after is the equity in the house,” says Arizona Attorney General Terry Goddard.

Foreclosure fraud has existed for a long time. But in recent years, experts and law-enforcement officials say, the schemes have grown increasingly complex, with scam artists often eyeing the chunks of equity that homeowners across the country amassed during the rapid housing-price appreciation from 2000 to 2005.

The scams are getting a boost as the housing boom fades and the numbers of past-due mortgage loans and foreclosures climb. Foreclosures historically have hit mainly homeowners with weak credit ratings. But now, a wider range of borrowers are struggling to pay off high-priced loans that lenders churned out during the boom. Online foreclosure-data service RealtyTrac says more than one million borrowers have seen their properties put in foreclosure so far this year, up 27% from the same period last year.

Statistics on the exact number of foreclosure-fraud cases filed are hard to come by as they are usually lumped together with mortgage fraud, which includes fraud against both lenders and borrowers. The Federal Bureau of Investigation estimates that mortgage fraud led to over $1 billion in losses in 2005, up from $429 million a year earlier. “We’re increasing our focus on mortgage fraud,” says Bill Stern, a supervisory special agent and mortgage-fraud coordinator at the FBI.

Alejandro and Martha Balderas tried for months to refinance their Chicago home and take it out of foreclosure after medical bills kept the couple from keeping up with their mortgage payments. They thought they had found their white knight when Platinum Investment Group LLC, a mortgage and real-estate investment company, promised the couple a loan against their house so they could pay off their mortgage and stay in their home, according to a complaint filed against Platinum in Circuit Court of Cook County, Illinois, by the state attorney general’s office.

The Balderases, in their early 40s, signed on in April 2005 — only to find out soon afterward that they had signed over their home to Platinum, which then sold it. Unable to keep paying “rent” to the company, they are now threatened with eviction, Ms. Balderas says. “It’s a nightmare and we’re reliving it every day,” she says.

The Illinois attorney general charged that Platinum duped homeowners into transactions that caused them to lose substantial equity in their homes and face eviction. Platinum has denied the allegations. A lawyer representing Platinum didn’t respond to requests for comment.

A total of 10 states have legislation in place to deter foreclosure-rescue fraud, including California, Georgia, Missouri, Minnesota, Maryland, Colorado, Rhode Island, New York, Ohio and Illinois, according to Creola Johnson, an associate law professor at Ohio State University.

A common feature among those laws is that they give homeowners the right to cancel the “rescue” transaction days before the closing. In addition, for instance, under the legislation passed in Illinois this year, if a company acquires any financial interest in a property in foreclosure and simultaneously leases the property back to the homeowner and gives the owner the option to buy it back at a later date, the acquirer, in certain cases, must pay the homeowner at least 82% of the property’s fair-market value at the closing of the purchase.

The goal of the payout requirements under the Illinois law, which goes into effect Jan. 1, is to ensure that distressed homeowners receive a substantial and fair amount of home equity when entering into leaseback transactions, while giving legitimate foreclosure purchasers a reasonable chance to profit.

Another common type of consumer complaint involves so-called foreclosure consultants, who, for an upfront fee, promise borrowers to negotiate with their lenders to postpone or avoid foreclosures. Illinois and several other states forbid foreclosure consultants from charging an upfront fee before performing the agreed-upon services.

Still, homeowners who find themselves duped into foreclosure scams often have a hard time recovering their losses, consumer lawyers say. For example, state law may not protect consumers if their houses are sold to third parties who claim they were unaware of any alleged fraud, according to a National Consumer Law Center report on foreclosure fraud.

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By Ryan Chittum

From The Wall Street Journal Online

Colony Capital Acquisitions LLC closed a long-awaited deal to take over a massive mall project in New Jersey from struggling real-estate investment trust Mills Corp.

Also, Mills former Chief Executive Larry Siegel resigned his position as Mills chairman to help run the Meadowlands Xanadu project, which would be the most expensive mall built in the U.S.

Colony Capital President Richard Saltzman said yesterday the mall could cost up to $2.3 billion to complete. The project, under construction since March 2005, is now scheduled to open in the fall of 2008.

Under the agreement, announced late Wednesday, Mills is paying Colony Capital $175 million to take over the project. Mills wasn’t able to finance the mall’s cost, which has increased from an original projection of $1.2 billion.

About $800 million has been spent, and Colony Capital has financing for another $1.5 billion, of which $500 million is new equity, Mr. Saltzman said. Colony Capital will provide the majority of that new equity, while Dune Real Estate Funds will have a minority interest, he said. KanAm USA Management XXII LP, Mills’s original partner on the project, will retain an interest, which Mr. Saltzman declined to define. KanAm has spent about $340 million on the project, and Mr. Saltzman said it may put in more equity.

The deal clears the way for the possible sale of Mills after it releases its financial statements, which have been delayed more than a year. Mills, based in Chevy Chase, Md., has been hit by accounting woes and cash-flow problems, forcing it to slash its development pipeline, sell off assets and borrow money at a premium. Its shares have tumbled 51% in the last year.

Mr. Siegel stepped down as CEO last month after more than a decade. He presided over the project and was CEO when the outline of the deal with Colony was reached in August. Mills likely will have to write off about nearly $600 million it spent on Xanadu, according to earlier securities filings.

“We have a whole group of people joining us who had previously been at Mills,” Mr. Saltzman said. “Larry is going to have a very important leadership purpose with us.”

Mr. Siegel and Mills officials couldn’t be reached for comment yesterday.

Colony Capital said it has signed anchor tenants to an additional 200,000 square feet at the 2.2-million-square-foot mall, bringing the total leased to more than 500,000 square feet. Because of the troubled outlook for the project and its own woes, Mills had had trouble leasing retail and entertainment tenants.

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As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn’t produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

“We’re all going to have to be more creative in the next 12 to 24 months” in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel’s company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. “Word on the street is that California, Florida and Arizona will also be very active in the next 12 months,” Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for “real-estate owned.” They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year’s second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower’s default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year’s first half. In Ohio’s Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get “current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell,” says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, “you can’t think, ‘Would I live here?’ There are people at every level of income that need a roof.”

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The Associated Press

By MARTIN CRUTSINGER

Sales of existing homes posted a tiny increase in October but the median home price fell by a record amount. Analysts forecast more price declines in coming months as the once-booming housing market undergoes a painful correction.

The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million last month. It was the first increase after seven consecutive monthly declines.

However, the median price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record.

It marked the third straight month that median prices have fallen compared with the same period a year ago, the longest stretch of such declines on record. The median is the point where half the homes sold for more and half for less.

David Lereah, chief economist for the Realtors, said he expected home prices to continue falling for the rest of the year as sellers, accustomed to the booming market conditions of previous years, reluctantly cut their prices.

‘Many buyers remain on the sidelines,’ Lereah said. ‘After a period of price adjustment, we’ll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007.’

The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.

Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.

For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.

The inventory of unsold homes rose by 1.9 percent in October to 3.85 million units, the second highest total on record. It would take 7.4 months to exhaust the backlog of unsold homes at the October sales pace.

Analysts predicted further price declines with inventories of both existing and new homes hovering near record levels.

By region of the country, median prices were down the most in the South, a drop of 7 percent followed by declines of 5.2 percent in the Northeast, 1.2 percent in the Midwest and 0.6 percent in the South.

Lereah said the big price decline in the South could represent not only sellers adjusting their asking prices but also a changing mix of sales with lower-priced areas of the South such as Texas seeing an increase in sales while high-priced areas such as the Washington, D.C., area and Florida still suffering sales declines.

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