Real Estate FAQ

What Are Equity-Stripping Scams?

The US economic crisis has hit the average homeowner hard. Millions of people will face foreclosure on their homes in the next couple of years. If you are facing a possible foreclosure due to late mortgage payments, be sure to proceed carefully. Using a scheme known as equity stripping, unscrupulous scammers nationwide are increasingly preying upon distraught and unsuspecting homeowners who are in fear of losing their homes. Particularly hard hit are communities of color.

Background

The explosion of adjustable rate mortgages (ARMs) has contributed to the rise in foreclosures. An ARM initially is set at a relatively low interest rate, but is designed to jump to a much higher rate later, resulting in payments so much higher that many homeowners can no longer make them. Banks and other lenders did not properly screen such customers for their ability to pay in the scramble to seal more and more deals, which were often immediately sold on the secondary mortgage market for other investors to worry about later.

Equity Stripping

People and companies eager to make a quick profit on the suffering of others monitor public records of properties faced with foreclosure. Desperate and vulnerable homeowners are approached with offers of rescue. While the scams can take a variety of forms, often the homeowner is told that he or she can stay in the house and the scam artist will bring the loan current and secure another loan. The scared and desperate homeowner is told to sign complicated papers that in reality transfer the home to the scammer, who refinances the home and absconds with the equity. Sometimes the owner is told to temporarily sign over the property to someone else for protection. Either way, the homeowner is soon in a home that is facing foreclosure again, this time with no prospect of recovering any of the equity that may have taken years to build up.

Legal Issues

State Attorneys General and the US Department of Housing and Urban Development (HUD) have taken swift action to educate the public in an attempt to protect unsuspecting equity-stripping victims. A handful of states, following California's lead, have enacted legislation specifically aimed at this particular practice. Other states are prosecuting these cases under consumer fraud and deceptive trade practice laws.

Protect Yourself

If you suspect you may not be able to stay current on your mortgage, if you are in default or if you face foreclosure, take immediate action to protect yourself:

  • Contact your lender. If your problems will probably be temporary, try to arrange refinancing, renegotiation or forbearance of the loan. Explore all options.
  • If your situation is not likely to improve, consider whether selling the home to recover your equity might be a wise idea. A less expensive living arrangement may be the answer, at least temporarily.
  • Consult a reputable financial counselor.
  • Report equity-stripping scams to your state attorney general's office or HUD for advice and possible protection. The scammers are acting illegally and probably committing crimes.
  • Get advice from a reputable real estate attorney. Have all legal documents thoroughly reviewed by your lawyer before signing.

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