With some 1.6 million homes either already in bank custody or somewhere in the foreclosure process, as many as 4 million more delinquent but not quite over the edge and property values depressingly depressed, scams are springing up that heap more misery on the already desperate.
"There are different scams to which people who are in foreclosure are susceptible," said Daren Blomquist, director of marketing communications for RealtyTrac. "They're in a tough position already and these scams make their situation worse.
"The primary one is offering help to the homeowner to avoid or get out of foreclosure. They ask for a fee up front and then don't deliver, doing nothing."
When a property goes into foreclosure, public notice is filed and the scammers reach out to the homeowners. The scammers tell the desperate homeowner they will negotiate with the bank to win a loan modification for a fee.
"The key really is they're asking for that money up front," Blomquist said. "That should be a warning flag."
The Federal Trade Commission adopted a rule that makes it illegal for a company to collect a fee until "a homeowner has actually received an offer of relief from his or her lender and accepted it."
"That means even if you agree to have a company help you, you don't have to pay until it gets you the result you want," the FTC advises on its Web site.
Among the scam tactics are telling homeowners not to contact their lenders and insisting mortgage payments be made through them while negotiations are under way, saying a "forensic loan auditor" will go through mortgage documents to see if they comply with the law and whether any errors can be used to avert foreclosure, asking the homeowner to surrender title and rent the home back at exorbitant rates or giving the homeowner phony papers with alternative loan terms that actually have the homeowner surrendering title.
The Federal Reserve advises homeowners not to pay hundreds of dollars for counseling services, to be wary of any company that says it can "guarantee" results and to realize any deal that sounds too good to be true probably is.
Blomquist advises contacting the U.S. Department of Housing and Urban Development to find legitimate operators.
"There are good players out there too," he said.
Most of the properties in default or foreclosure are those secured by newer mortgages. The properties are generally in overbuilt areas where home prices escalated rapidly.
"We have people who bought near the top of that housing bubble who have been more susceptible to foreclosure, also people who purchased or refinanced during the bubble years and used their homes as an ATM to take out money with the refinancing," Blomquist said.
"The bottom line is both of those sets of homeowners have very little equity padding to work with. When prices went down, they quickly became underwater with their mortgages [loan amount greater than property value]. They didn't have anything to leverage. The mortgages themselves were very toxic -- starting with low teaser rates and then they reset at higher rates. Homeowners couldn't afford it."
RealtyTrac reported last week the number of foreclosure filings issued in August was up 7 percent from July to 228,000 but still a third lower than last year's count.
As grim as the statistics look, Blomquist noted the number of delinquencies and foreclosures represent only a small fraction of the 43 million mortgages out there and millions more homes owned outright. That comes to a national average of 1 in 570 homes receiving foreclosure notices -- the number is 1 in 118 homes in Nevada while in Vermont, rate is 1 in 34,916. Five states -- California, Florida, Michigan, Illinois and Georgia -- account for 53 percent of all foreclosure activity.
In the second quarter, 31 percent of all real estate sales were foreclosed or bank-owned properties, compared to 1 percent to 5 percent of all sales in 2005 before the real estate balloon deflated.
"It's not going to get any better any time soon," Blomquist warned. "There's a lot of inventory with more properties in the pipeline."
Blomquist estimates it will be 2014 before the market gets back to normal -- and that's only if there's no double-dip recession and sales remain at their current pace.
"It took some years to build up this problem. It will take some years to clear," he said.
Blomquist said RealtyTrac is seeing some bright spots. The number of foreclosures are going down in California, Arizona, Nevada and Florida and prices seem to be stabilizing in Phoenix, where sales are picking up.
Another bright spot is mortgage rates. Freddie Mac reported 30-year fixed mortgage rates for the week ended Thursday averaged 4.09 percent while the 15-year fixed rate averaged 3.3 percent.
"Prices have come down so much, demand is picking up," Blomquist said, adding it may take "several years to see" property values, which have taken a 40 percent hit, recover.
The District of Columbia "probably has fared the best" but Washington can't be used as a national barometer because the impact of the federal government skews the figures.
In its latest pending home sales report, the National Association of Realtors reported July sales were down from June but still well above year-ago levels. July sales were off 1.3 percent compared with June but were 14.4 percent above July 2010 levels.
"Looking at pending home sales over a longer span, contract activity over the past three months is fairly comparable to the first three months of the year, and well above the low seen in April," said Lawrence Yun, chief economist for the Realtors group. "The underlying factors for improving sales are developing, such as rising rents, record high affordability conditions and investors buying real estate as a future inflation hedge. It is now a question of lending standards and consumers having the necessary confidence to enter the market."