Equity Stripping Lawsuits

Equity stripping, or equity skimming, is a type of real estate fraud scheme. It typically involves a person gaining access to remaining equity in a home that is subject to foreclosure. The loan has gone into foreclosure because the homeowner has defaulted on their loan payments.

Thus, equity-stripping fraudsters often target people who have defaulted on their mortgage loans and are at risk of losing their homes. Needless to say, they may feel desperate because they understand that they may lose their home. Sometimes, younger, first-time buyers, as well as elderly homeowners, are targeted.

Equity stripping is often classified with other types of schemes, including predatory lending. It can also refer to a different situation in which the equity in an asset is blocked or encumbered, thereby preventing unsecured creditors from being able to reach the equity.

How Does Equity Stripping Occur?

There are several steps involved in an equity stripping scheme, as follows:

• Foreclosure: First, the homeowner defaults on their mortgage and is in danger of losing their home in a foreclosure proceeding;
• Foreclosure Notice: The lender publishes a foreclosure notice as required by law in local newspapers of record. Or a notice of foreclosure may be distributed by reporting services to investors and rescue artists. The homeowner in default on their mortgage loan may also contact lenders to ask about the possibility of refinancing their mortgage;
• Solicitation: A fraudster, which may be referred to as a “rescue artist,” is able to obtain contact information for the homeowner in foreclosure. The rescue artist contacts the homeowner directly via telephone or direct mail. Some lenders and brokers themselves refer homeowners in foreclosure who are not able to qualify for new mortgage loans to rescue artists. They are paid a commission by the rescue artist.
  • The rescue artist may offer the homeowner what they call a “miracle refinancing.” Or they may tell the homeowner that they can save their home from foreclosure. A desperate homeowner will listen, of course, to any plan to save their home. They tell the homeowner that they are a “private investor”;
• Acquisition: The rescue artist convinces the homeowner to transfer the title to their house to them as a way to avoid foreclosure. In some cases, the rescue artist may have the homeowner live in the home as a tenant and pay rent to the rescue artist.
  • The rescue artist or an accomplice in the scheme pays off the remaining balance on the mortgage loan that is in foreclosure and acquires the deed in this way. When the deed transfers title to the fraudster, they also acquire any equity that the homeowner has managed to gain while they owned the property.
  • The rescue artist may tell the homeowner that they intend to reconvey the property back to the homeowner in the form of a lease or a contract for deed.
  • The rescue artist becomes the owner of any equity in the home. The homeowner loses the equity and no longer owns the home, although they may not even realize this. The homeowner may pay rent to the rescue artist to stay in the home. They may believe that they are paying a new mortgage loan and still own their home;
• Negative Results: At some point, the fraudster abandons the situation. If the former homeowner rents the property, the rescue artist may evict them and make off with all of the equity. It is possible that the former homeowner would still owe the balance of their former mortgage loan that went into foreclosure.

In most equity stripping cases, the previous owner loses the title and any financial benefit associated with it. Of course, the tenant is often reluctant to leave the situation because they still have hopes of reclaiming their property. In the long run, the rescue artist makes off with the remaining equity that was still left in the home. The former homeowner must walk away with nothing.

There are different ways in which this type of fraud can be perpetrated on unsuspecting homeowners who are only looking for a solution to their financial problem and hoping to keep their home.

What Are the Legal Penalties for Equity Stripping?

Equity stripping can result in some significant legal consequences for the scammers. The defrauded homeowner might be able to identify the people and companies that may have participated in the scheme to defraud them and specify the role they played. In that case, the homeowner may be able to file a civil lawsuit against these individuals and possibly any lenders who were involved.

This can help the person to recover losses caused by the equity stripping fraud that was perpetrated on them. Here, the money damages recovered in a civil lawsuit may compensate the homeowner for their lost equity, legal fees, and other losses associated with the situation.

Several states have passed laws aimed at preventing equity stripping or at least regulating these schemes. One of these states is Minnesota, which has adopted a law targeted at what it calls “foreclosure reconveyance” practices but is equity stripping. Maryland and 14 other states have followed the Minnesota model.

The laws in these states mandate necessary disclosures to homeowners about these transactions, place limits on fees that can be charged, and have protections to ensure that the consumer has the ability to pay on behalf of the consumer. The statutes also prohibit certain deceptive and unfair practices associated with equity stripping.

In California, Georgia, and Missouri, there are laws that regulate the activities of what are referred to as “foreclosure consultants.”

In addition, all states have state laws that address fraud and unfair and deceptive trade practices. The federal Truth in Lending Act may also apply to these fraudulent transactions. The Federal Trade Commission may be able to provide a homeowner with advice and access to resources that may help them.

How Can I Avoid Equity Stripping?

One way to protect yourself against foreclosure rescue schemes is to look for advice from people who are not trying to defraud a person or profit from their problems. A person may contact housing counselors recommended by the federal Department of Housing and Urban Development (HUD). HUD has housing counseling agencies all over the U.S. They provide advice for free or at a low cost.

A person can search for a housing counseling agency online at http://www.hud.gov/counseling. On the website, a person can search the list of foreclosure avoidance counselors. Or a person can work through HUD’s interactive voice system at (800) 569-4287.

Another good option is to consult a qualified mortgage lawyer for help. It is important that a person not believe someone they do not know who contacts them and promises to save them from foreclosure. A person should remember that if it sounds too good to be true, it probably is not true.

Do I Need a Lawyer for Help With an Equity Stripping Issue?

Equity stripping can leave a property owner in a very difficult place. If your home mortgage loan is in foreclosure, you want to consult a mortgage lawyer. Your lawyer can tell you about the legitimate options you have. Your lawyer will protect your rights so you are not victimized by fraudsters and schemers who want to take advantage of your difficulty.

LegalMatch.com can connect you to an attorney who can ensure that your interests are being protected. If you need to file a legal claim, your lawyer will be able to represent you in a court of law in connection with your claim.