New Jersey Attorney General Stuart Rabner and Acting Consumer Affairs Director Stephen B. Nolan recently issued a warning to New Jersey residents about a foreclosure rescue scam involving "surplus funds", the money that represents that portion of the sale proceeds of a foreclosure sale that is left over after the proceeds are first applied to paying off the amount owed to a foreclosing mortgage lender and, (apparently) in New Jersey, any unpaid real estate taxes, according to a Press Release
from the New Jersey AG's office.
These surplus funds, also referred to as the "surplus money", "excess funds" or "overage" (and possibly other terms), represent the homeowner's equity in his/her home that they are entitled to claim after the foreclosure sale takes place. Therefore, and contrary to what some foreclosure rescue operators will falsely have people believe, when a homeowner loses his/her home in a foreclosure sale, the home equity, if any, is not necessarily lost
. If the sale price exceeds the amount owed, the balance (ie. the surplus funds) is typically held in an account by the court that ordered the sale and it simply sits there until the homeowner comes forward and claims it (or until a scam artist comes forward, forges or otherwise tricks the homeowner into signing the necessary paperwork, and steals it - see, for example, Arrests Made in South Florida Foreclosure Scams
, involving an alleged theft of foreclosure surplus funds that may have victimized at least 20 Florida homeowners).
Further, because of the significant increase in third party investors attending and bidding at these foreclosure sales throughout the U.S. over the last few years (in large part due to the spike in property values in many parts of the country during the early 2000's; in some part due to the "foreclosure investing" infomercials on late night cable TV), the sale prices at these foreclosure sales have typically come pretty close to full fair market value (unlike the old days when an investor could pick up a pretty good deal at a significant discount at these forced sales). As a result, it has been quite common for there to be surplus funds left over after a foreclosure sale took place and a foreclosing lender got paid off on its outstanding loan.
Due to the fact that many homeowners are unaware of their rights to the surplus money, a profit opportunity is open for both the ethical and the unethical to capitalize on the recovery of these surplus funds. This is the case in spite of the fact that, at least in New Jersey, homeowners can obtain the surplus funds on their own simply by filing a simple form and paying less than $100 (if you're a New Jersey resident, more information is available from the New Jersey Superior Court Trust Fund Unit at 609-292-3937; my guess is that other local court systems throughout the rest of the U.S. have some type of system for assisting homeowners recover their surplus funds).
The unethical and the con artists who have gotten into this area of foreclosure rescue have engaged in one of two forms of this scam (which can be thought of as a creative form of "equity stripping"
) and which are described in the Press Release. To read more, see Consumers Cautioned About “Surplus Funds” Scams Amid Rising Foreclosure Filings
For concise, one page brochures warning against scams involving the surplus money left after a foreclosure sale, see:
To read about the recent legal action settled by the Washington State Attorney General against three foreclosure rescue operators involving a "surplus funds" scam, see More On AG McKenna's Settlement With Foreclosure Rescue Operators
Click here to Watch the TV report on the Washington case on Channel 4 KOMO-TVEditor's Note
I suspect that, because of the general downturn in values in the real estate market recently, more and more lenders will be foreclosing on homes on which they're owed more than what the properties are worth; these properties are said to be "upside down". In these cases, the foreclosing mortgage lenders will be stuck buying these "upside down" properties themselves at a foreclosure auction or forced into allowing the properties to be sold to third party bidders at said auction for less than the amount owed. Accordingly, in these cases there will be no surplus funds for homeowners to claim.(corrected 3-22-07).