State cracks down on bailout scams

Massachusetts Attorney General Martha Coakley yesterday issued an emergency regulation to ban foreclosure-rescue scams that rob financially troubled homeowners of their properties.

The ban extends for 90 days, but Coakley intends to follow up with a permanent regulation to make foreclosure-rescue scams illegal in Massachusetts.

In these schemes, for-profit companies promise to help troubled homeowners, who often unwittingly relinquish ownership of their properties in order to save them.

Coakley said her office has received dozens of complaints about such bailout offers, and since August, the office has brought four suits against lawyers, individuals, loan brokers, lenders, or firms, alleging they engaged in illegal rescue schemes.

Coakley said she will also propose restrictions on mortgage lenders to prevent the kind of lax or fraudulent practices that many regulators said are behind the state's high rates of foreclosure. Coakley wants to make it explicitly illegal for lenders to inflate or falsify borrowers' incomes in order to make them appear qualified for a loan.

She would also restrict use of no- or low-documentation mortgages, which do not provide independent verifica tion of borrowers' incomes. Another measure would prevent lenders from selling mortgages to customers who are unable to repay them.

Coakley argues new regulations are necessary because current state laws on fraud don't explicitly detail what constitutes mortgage fraud. The emergency crackdown on foreclosure-rescue scams -- the first emergency regulation issued by the department since 1998 -- is justified, Coakley said. Such rescue scams are becoming more prevalent as the number of homeowners in foreclosure increases, but the assistance is "illusory," and "the harm that is done is often irreparable for the borrower," she said.

In 2006, lenders filed a record 19,487 foreclosures notices against Massachusetts homeowners. Most involved subprime mortgages, which are usually sold to borrowers with poor credit and often contain low introductory payments that rise sharply after two years.

Shirelle Carrigan said she lost $96,000 in equity and her Brockton home after signing over her property to attorney Alec G. Sohmer, who offered to help prospective foreclosure victims like her save their homes. Last August, the attorney general sued the lawyer and his wife, Jennifer, claiming they were offering a foreclosure-rescue scam .

Carrigan said she agreed to Sohmer's plan to save her house. The state said Sohmer persuaded clients to sell him their properties unwittingly , promising they could stay in them by making payments to him and then "repurchase" them later. When the clients couldn't make the payments, Sohmer tried to evict them and sell the property, the attorney general's office claims.

Carrigan, a single mother of four and home health aid and social worker who earns about $25,000 a year from her two jobs, said she lost her house in February 2005 and is now renting in Brockton. "I trusted him, because he's a lawyer," she said.

Sohmer disputed that she had any equity in her home and said his program had been approved by US Bankruptcy Court in Boston. "I dispute the allegations, and we are contesting it," he said.

The mortgage industry has embraced some of Coakley's proposals and objected to others. Kevin Cuff, president of the Massachusetts Mortgage Bankers Association, said his members would favor cracking down on foreclosure-rescue scams, which are "reprehensible." The attorney general's actions were "very proactive," he said.

Cuff said the industry favors a prohibition of falsified income on loan applications, but opposes Coakley's proposal that would require lenders to determine whether a mortgage is "suitable" for a borrower, for example, on the grounds it is vague and could expose the industry to litigation if a mortgage goes bad.

Coakley plans to hold hearings on the ban and on the other lending regulations after a 28-day period in which the public and the lending industry can comment on the two-pronged proposal. She hopes to put the new regulations in place by late August. If approved, they would make mortgage fraud and foreclosure rescues fraudulent under the state's civil laws.

Kimberly Blanton can be reached at blanton@globe.com.