- Equity stripping
Equity stripping, also known as equity skimming or foreclosure rescue, is any of various predatory
real estatepractices aimed at vulnerable, often low-income, homeowners facing foreclosurein 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 propertiesfrom 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. [cite news |first= |last= |authorlink= |coauthors= |title=New Scheme Preys on Desperate Homeowners |url= |quote=With the housing market in decline, financial predators are finding yet another way to take advantage of people who fall behind on their payments. Shakeela Muhammad signed up for a mortgage program to save her home. The company stopped making payments, and she faces foreclosure. The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes. |publisher= New York Times|date= July 3, 2007|accessdate=2007-07-03 ]
Term and definition
The term "equity stripping" has sometimes referred to
subprimelending refinancepractices 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 [Allen Fishbein and Harold Bunce, "Subprime Market Growth and Predatory Lending," 277 (HUD Publications 2001)] . 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. [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]
In addition to the uses described herein, the term "equity stripping" also refers to the
asset protectionconcept whereby the equity of an asset is encumbered, or stripped, to frustrate collection efforts by unsecured creditors.
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 [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] . However, with an increase in values, foreclosure rates also peaked in 2001 and remained high [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)] , leaving numerous foreclosed homeowners with substantial equity. With these trends, a market emerged to tap into this equity.
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.
Rescue artists obtain contact information for foreclosed 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.
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
leaseor a contract for deed.
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.
Several states have passed laws to prevent and/or regulate equity stripping schemes.
Minnesotaand Marylandpassed laws in 2005 aimed at "foreclosure reconveyance" practices [Minn. Stat. 325N (2004); Md. Code Ann., Real Prop. 7-301 to 7-321 (2005)] . 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. [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]
Other laws regulating the activity of "foreclosure consultants" have been passed in
California, Georgia, and Missouri[Cal. Civ. Code 2945-2945.11; GA. Code Ann 10=1=393(b)(20)(A)(2005); Mo. Ann. Stat. 407.935-.943 (2005)] .
fraudand "unfair and deceptive trade practices" acts can be used when rescue artists have misrepresented their services and the end result. [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]
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 Actand the Home Ownership and Equity Protection Act are necessary [Ibid] .
HUD is also offering help to homewners that would like to learn about more alternatives to foreclosure. HUD can refer you to legit credit counsellors that will counsel you for free. They also came up with [http://www.hud.gov/foreclosure/index.cfm Tips for Avoiding Foreclosure] .
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.
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