A federal court banned First Universal Lending, LLC from the mortgage modification business and ordered them to pay nearly $19 million for consumer refunds, according to terms of a settlement with the Federal Trade Commission.

The company allegedly deceived homeowners with false claims that they would help to modify their mortgages. First Universal encouraged homeowners to stop making mortgage payments, saying lenders would not modify their mortgages unless they were at least a few months behind in their payments.

After charging consumers up to $7,000 in upfront fees, the company often did little or nothing to help them. The court subsequently halted the company’s operation, froze their assets and ordered them to disable their Web sites and computers.

Along with imposing a judgment of more than $18.8 million, the settlement order bans First Universal from the mortgage relief services business.

FICO reports that a credit gap for consumers will grow as lenders expect credit availability to fall short of consumer demand through the end of 2010.

The quarterly survey of bank risk professionals found that 73% of respondents expect the volume of credit applications to increase or remain steady over the next six months. However, 46% of respondents expect approval criteria for credit to get stricter. Furthermore, 38% of bankers surveyed expect the approval rate for credit applications to decline.

“Although the outlook isn’t as pessimistic as it was earlier this year, it’s clear we still haven’t reached a point of equilibrium between supply and demand for consumer credit,” says Dr. Andrew Jennings, chief research officer at FICO. “Banks remain concerned about loss prevention. Government data released in August indicates personal bankruptcies are at their highest levels in five years, and other recent data confirms the ongoing challenges in the employment and housing sectors. This type of economic environment makes it difficult for lenders to open up the flow of credit without taking on significant risk.”

Delinquency Report

When asked about expected delinquency rates for credit products, many bankers said they expected delinquencies to increase. This includes home mortgages (53% of respondents expected a rise in delinquencies), credit cards (42% expected an increase), small business loans (47% expected an increase) and student loans (49% expected an increase).

In a somewhat unexpected survey result, according to FICO, bank risk officers who are responsible for auto loans and credit cards had a particularly negative outlook about their sectors. Among bankers who manage auto loans, 96% expect delinquencies on auto loans to increase or remain the same. And among bankers who manage credit cards, nearly 85% expect delinquencies on credit cards to increase or remain the same.

Respondents also were asked about their overall expectations for new delinquencies (i.e., accounts that become 30-days late) and chargeoffs (i.e., older delinquencies that are written off). Respondents felt both categories of delinquencies were going to rise, and the sentiment was similar in strength for both categories, which suggests the pipeline of delinquencies isn’t going to shrink in the near future.

The number of mortgage holders 60 days or more behind on their payments was 6.67% in the three months ended June 30, up from 5.81% a year ago, reports credit-reporting agency TransUnion.

Because it would be difficult for homeowners to make up two payments to bring their account current, TransUnion uses a 60-day delinquency rate as a warning sign of potential foreclosure.

One positive sign amid the delinquency report is the statistic reveals a slower rate of increase from the pace seen a year ago. It also marks a slight improvement from the rate of 6.77% recorded during the first three months of the year, and it falls below the 6.89% record reached in the fourth quarter of 2009.

“We’re seeing signs of recovering in terms of delinquency,” says FJ Guarrera, vice president in TransUnion’s financial services unit.

The data comes after foreclosure listing firm RealtyTrac Inc. said the number of U.S. homes lost to foreclosure in July surged 6% from last year. That jump indicates that more banks stepped up repossessions to clear out their backlog of bad loans. RealtyTrac also reported that foreclosure filings were up in 75% of U.S. metropolitan areas in the first half of 2010.

“A lot of foreclosures continue to work their way through the system,” Guarrera says. Although the delinquency data does look back a few months, it shows a slight improvement that could indicate foreclosures will start to slow, he adds.

The four states hardest hit by the foreclosure crisis – Nevada, Florida, Arizona and California – are driving up the numbers. In each, the rate is above 10%, with Nevada leading at 15.86%, compared to 13.8% a year ago. In Florida, the delinquency rate rose to 15%, from 12.3% last year.

Several companies are banned from selling mortgage modification or foreclosure relief services under settlements with the Federal Trade Commission.

The FTC alleged that the companies charged homeowners upfront fees and falsely claimed they could get their mortgage loans modified or prevent foreclosure on their homes. The settlements in three separate actions are part of the FTC’s ongoing efforts against scams that target financially distressed consumers.

The FTC settled with the following defendants: (1) Federal Loan Modification Law Center, (2) Loss Mitigation Services, Inc., and (3) Hope Now Modifications.

Federal Loan Modification Law Center settled FTC charges that it advertised and sold a “Federal Loan Modification program.” They charged up to $3,000, but often failed to live up to the promised results, according to the FTC’s complaint.

The settlement permanently bans the owner of Federal Loan Modification from selling mortgage relief services and from telemarketing any good or service. The order imposes an $11.5 million judgment.

Loss Mitigation Services settled allegations that they falsely promised that a loan modification was virtually assured if consumers paid an advance fee of up to $5,500.

Loss Mitigation Services Inc. and Synergy Financial Management Corp., doing business as Direct Lender or DirectLender.com, also allegedly misrepresented that the companies were a department of, or affiliated with, the consumer’s lender or mortgage servicer. In addition, Loss Mitigation Services falsely claimed that consumers would receive refunds if LMS or Direct Lender failed to secure a loan modification. In many cases, the defendants failed to obtain loan modifications for consumers, and some consumers lost their homes while waiting for the promised results.

Under the settlement orders, LMS is banned from selling mortgage relief services. The orders also impose a $6.2 million judgment.

Hope Now Modifications and Hope Now Financial Services Corp. settled FTC charges that they falsely claimed they could obtain mortgage loan modifications in virtually all cases and would refund consumers’ money if they failed, and that they were affiliated with, or part of, the HOPE NOW Alliance, a free federal homeowner assistance program.

In addition to banning Hope Now from selling mortgage relief services, the order also imposes a judgment of almost $5.3 million.

The Civil Justice Network is piloting a new statewide program, the Maryland Mortgage Fraud Prevention Project (MFP), which aims to help prevent mortgage fraud by ensuring Maryland homebuyers are signing documents in line with the type of loan they expect. To ensure transactions are in the best interest of homeowners and lenders, first-time homebuyers and those seeking mortgage refinancing are encouraged to seek legal advice prior to signing their purchase contracts and loan documents. By providing homeowners with the access to legal review services prior to signing their mortgage documents, homebuyers can avoid obtaining a mortgage that could place them at risk of foreclosure.

Don’t ignore the problem.   The farther behind you are, the harder it is to catch up and it becomes more likely that you will lose your home.  Make sure to contact your lender as soon as you know you have a problem.  You will need to be persistent but your chances of success are greater if you start working with your mortgage company early.  Consider contacting a non-profit, certified housing counselor.  They can help you understand your options and help you in negotiations with your lender.  Avoid credit counseling agencies that require a large upfront fee.  Try contacting a HUD approved counselor.  If you receive a foreclosure notice, get legal help by contacting Legal Aid or the National Association of Consumer Advocates.  Open all mail that you receive from your mortgage company.  Usually the first notices you receive include information about options to prevent foreclosure.  Failing to open your mail will not delay foreclosure and you could miss an opportunity to save your home.  Ask your lender if your mortgage loan can be modified or restructured.

If you are trying to renegotiate your mortgage under the HOPE for Homeowners program, make sure you read the fine print.  HOPE for Homeowners (H4H for short) was signed into law this summer as a means of trying to keep homeowners in their homes and prevent them from defaulting on their mortgages.  Under the program, lenders refinance the current mortgage to a maximum of 90% of the home’s current value.  The new loan can only be a 30 year fixed rate loan.  The FHA is insuring these new loans.

The H4H program, while giving great benefit up front, is costly on the back end.  You get to keep your home and avoid foreclosure but at significant cost.  If you participate in the program, you will have to split the equity in the house with the FHA when you sell your house.  FHA gets a 50% share of the home’s equity for as long as you own the house even if you pay off the mortgage.  If your home increases in value, you have to share the amount of the increased equity with FHA as well.

Other rules apply as well.  Program participants are prohibited from taking out a second mortgage unless the money is used to maintain the house.  There is also mortgage insurance to pay at 1.5% of the mortgage amount.  Usually, an FHA mortgage only has a .5%  premium.

HUD is holding a foreclosure prevention clinic today in Prince George’s County at the Show Place Arena in Upper Marlboro.  There are 2 separate sessions at 2 pm and 5 pm.  You can register for the event by calling 1-800-CALL-FHA.  If you are facing foreclosure or having problems paying your mortgage, I urge you to attend this clinic.