Equity stripping

Equity stripping, also known as equity skimming or foreclosure rescue, is any of various 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

2000s 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, victims are often unaware that they are giving

away their property and 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

egregious or unmeetable terms. [1]


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. 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 homeowners often lead to foreclosure, and those victims more often fall

to equity stripping scams[2]. 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 agents and investors, while traditional

predatory lending is carried out by large banks or national companies.[3]

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 [4]. However, with an increase in

values, foreclosure rates also peaked in 2001 and remained high[5], leaving numerous foreclosed

homeowners with substantial equity. With these trends, a market emerged to tap into this equity.

Scam Elements

Foreclosure

A homeowner falls behind on his mortgage 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.

Solicitation

Rescue artists obtain contact information 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.

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 paid 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.

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.

Legal Remedies

State Protections

Several states have passed laws to prevent and/or regulate equity stripping schemes. Minnesota and

Maryland passed laws in 2005 aimed at "foreclosure reconveyance" practices[6] . 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.[7]

Other laws regulating the activity of "foreclosure consultants" have been passed in California, Georgia,

and Missouri[8].

Additionally, state fraud and "unfair and deceptive trade practices" acts can be used when rescue

artists have misrepresented their services and the end result.[9]

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[10].

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.