Equity stripping
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Equity stripping, also known as equity skimming or foreclosure rescue, scams can include an assortment of predatory real estate practices aimed at vulnerable, often low-income, homeowners facing foreclosure in the United States. Often considered a form of predatory lending, equity stripping began to spring up in the early 2000's and is conducted by investors or small companies that take properties from foreclosed homeowners in exchange for allowing the homeowner to stay in the property as a tenant. Most often, these transactions take advantage of uninformed, low-income homeowners. Because of the complexity of the transaction and false assurances given by rescue artists, consumers are often unaware they are giving away their property and their equity. In recent years, several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure reconveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and aggregious or unmeetable terms.
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[edit] Term and definition
The term "equity stripping" has sometimes referred to subprime lending refinance practices that charge excessive fees thereby "stripping the equity" out of the home. The practice more often describes foreclosure rescue scams in many states. While most do not consider equity stripping a form of predatory lending, per se, equity stripping is related to traditional forms of that practice. Subprime loans targeted at vulnerable and unsophisticated consumers often lead to foreclosure, and those victims more often fall to equity stripping scams[1]. Additionally, some do consider equity stripping, in essence, a form of predatory lending since the scam works essentially like a high-cost and risky refinancing. "Equity stripping," however, is conducted almost always by local actors and investors, while traditional predatory lending is carried out by large banks or national companies[2]
[edit] Market conditions
Trends in the United States economy have led to the growing market for foreclosure services and equity stripping. Property values have increased dramatically from 2000-2005 [3]. However, with an increase in values, foreclosure rates also peaked in 2001 and remained high[4], leaving numerous foreclosed homeowners with substantial equity. With these trends, a market emerged to tap into this equity.
[edit] Scam Elements
[edit] Foreclosure
A homeowner falls behind on payments and enters foreclosure. Foreclosure notices are published in newspapers or distributed by reporting services to investors and rescue artists. Foreclosed homeowners also contact lenders to inquire about refinancing options.
[edit] Solicitation
Rescue artists obtain contact info for foreclosured homeowners and make contacts personally, by phone, or through direct mail. Some lenders and brokers will also refer foreclosed homeowners that do not qualify for new loans to rescue artists for a commission. Rescue Artists offer the foreclosed homeowner a "miracle refinancing" and/or say they can "save the home" from foreclosure.
[edit] Acquisition
Rescue artists arrange the closing (often delaying the date until shortly before the homeowner's removal in order to create urgency). At the closing, the homeowner transfers title (possibly unwittingly) to the rescue artist or an arranged investor. The rescue artist or arranged investor pays off the amount owed in foreclosure to acquire the deed, and inherits or is payed any portion of the homeowner's remaining equity. The rescue artist will reconvey the property back to the homeowner in the form of a lease or a contract for deed.
[edit] Result
The homeowners remain in the home and pay rent or contract-for-deed payments (often higher than their previous mortgage payments). They inevitably fall behind, and are evicted from their homes with very little of their equity.
[edit] Legal Remedies
[edit] State Protections
Several states passed laws to prevent and/or regulate equity stripping schemes. Minnesota and Maryland passed similar laws in 2005 aimed at "foreclosure reconveyance" practices[5] . The state laws require adequate disclosures, capped fees, and an ability to pay on behalf of the consumer. The statutes also ban certain deceptive and unfair practices associated with equity stripping.[6]
Other laws regulating the activity of "foreclosure consultants" have been passed in California, Georgia, and Missouri[7].
Additionally, state fraud and "unfair and deceptive trade practices" acts can be used when rescue artists have misrepresented their services and the end result.[8]
[edit] Federal Protection
Since foreclosure rescue schemes are essentially refinancing loans secured by the home, consumers can often successfully argue that disclosures required for all loans by the federal Truth in Lending Act and the Home Ownership and Equity Protection Act are necessary[9].
[edit] Non-Predatory Foreclosure Rescue
In certain circumstances, foreclosure rescue services can be beneficial to the consumer. When refinancing options are exhausted and foreclosure proceedings have led to near eviction, a foreclosure rescue transaction with moderate fees and full disclosures can be legally and ethically executed.
A consumer can face removal from the property and the loss of their entire equity following a foreclosure auction. As an alternative, foreclosure rescuers have the ability to redeem the home from foreclosure with a new mortgage of their own. For a moderate fee or portion of the existing equity, this can keep the former homeowner in the home as a tenant while they repair their credit or increase their income. After a given time period, the homeowner can then repurchase the property from the rescuer.
If done with full verbal and written disclosure, terms the consumer is capable of fulfilling, and moderate total fees, foreclosure rescue can be suitable to consumers in dire situations.
This mechanism is often used by family members or friends in order to prevent the loss of a home. In effect, the investor "lends" their good credit to the foreclosed homeowner by paying off the foreclosed mortgage and obtaining the title to the home temporarily.
[edit] References
- ^ Allen Fishbein and Harold Bunce, "Subprime Market Growth and Predatory Lending," 277 (HUD Publications 2001)
- ^ Steve Tripoli and Elizabeth Renuart, National Consumer Law Center, "Dreams Foreclosed: The Rampant Theft of Americans' Homes Through Foreclosure 'Rescue' Scams (2005), available at www.consumerlaw.org/news/content/ForeclosureReportFinal.pdf
- ^ Office of Federal Housing enterprise Oversight, House Price index for the Third Quarter of 2005, at 24(Dec. 1, 2005), available at www.ofheo.gov/media/pdf/3q05hpi.pdf
- ^ Office of Policy Development and Research, U.S. Department of Housing and Urban Development, U.S. Housing Market Conditions-3rd Quarter 2005 at 74 (2005)
- ^ Minn. Stat. 325N (2004); Md. Code Ann., Real Prop. 7-301 to 7-321 (2005)
- ^ Prentiss Cox, "Foreclosure Equity Stripping: Legal theories and Strategies to Attack a Growing Problem," Clearinghouse REVIEW Journal of Poverty Law and Policy, 607-626, March-April 2006
- ^ Cal. Civ. Code 2945-2945.11; GA. Code Ann 10=1=393(b)(20)(A)(2005); Mo. Ann. Stat. 407.935-.943 (2005)
- ^ Prentiss Cox, "Foreclosure Equity Stripping: Legal theories and Strategies to Attack a Growing Problem," Clearinghouse REVIEW Journal of Poverty Law and Policy, 607-626, March-April 2006
- ^ Ibid
