California alert for mortgage rescue scams

By Jim Christie

SAN FRANCISCO, March 22 (Reuters) - California prosecutors are on guard for mortgage rescue scams in which lenders target borrowers who may foreclose on failing home loans amid the subprime mortgage meltdown, an official said on Thursday.

Defaults of subprime mortgages -- home financing for the riskiest borrowers -- have increased across the United States in recent months, pushing some lenders out of business, forcing others to discontinue the loans and triggering fears of damage to the broader economy.

Many subprime borrowers are in default or foreclosure because interest rates on their mortgages have reset following low initial levels, making monthly mortgage payments too expensive for their budgets. With adjustable rate mortgages resetting, an estimated 1.1 million U.S. borrowers who took on the loans between 2004 and last year are at risk of losing their homes, according to a report by First American CoreLogic, a Santa Ana, California, company that tracks property financing trends.

California may be hit hardest because higher loan payments are kicking in amid slowing home sales and flat or slipping home prices, experts say..

"Outright price deflation is a risk factor that will drive defaults," Glenn Costello, co-head of U.S. residential mortgage-backed securities at Fitch Ratings, said on Thursday during a conference call.

"Our concern today is that the low home price appreciation environment is going to make it more difficult for borrowers to refinance," Costello added.

At the end of December, a fifth of mortgages in California were loans to subprime borrowers. State Attorney General Jerry Brown's office is keeping a close watch for reports of mortgage rescue offers to distressed mortgage holders, said Al Shelden, chief of the office's consumer law section.

"It's certainly an interest of the office," Shelden told Reuters in a telephone interview. "We are worried there will be more of these as foreclosures increase."

"There was a large uptick in these in the early '90s, the last time there was large increase in foreclosures," Shelden said. "So far, we're just being vigilant."

Offers to panicky mortgage holders may include promises of financial help that never come through though fees are charged, as well as arrangements that fraudulently transfer ownership of a house.

Mortgage holders who receive default notices from lenders should not delay in trying to strike a deal to avoid foreclosure, Shelden said.

"It's conceivable the lender will want to work with them," Shelden said. "Most lenders don't want to end up with a stockpile of 500 homes because for those that are federally regulated it will affect their ratio of good loans to bad, which is looked at as financial stability criteria."

(Additional reporting by Walden Siew in New York)

(For more stories on the subprime sector, please click on [ID:ID:N16195443])

((Reporting by Jim Christie; editing by Jonathan Oatis; Reuters Messaging: jim.christie.reuters.com@reuters.net; e-mail: jim.christie@reuters.com; Tel: +1 415 677 2539)) Keywords: USA SUBPRIME/CALIFORNIA

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