Equity stripping
Encyclopedia
Equity stripping, also known as equity skimming, is a type of foreclosure rescue scheme
. Often considered a form of predatory lending
, equity stripping became increasingly widespread in the early 2000s. In an equity stripping scheme an investor buys the property from a homeowner facing foreclosure
and agrees to lease
the home to the homeowner who may remain in the home as a tenant. Often, these transactions take advantage of uninformed, low-income homeowners; because of the complexity of the transaction, victims are often unaware that they are giving away their property and equity. Several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure re-conveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or unmeetable terms.
s or national companies.
concept whereby the equity of an asset
is encumbered, or stripped, to frustrate collection efforts by unsecured creditors. This can be done to protect the assets of individuals or organizations in high-risk businesses (e.g. doctor
s) from losing equity in lawsuit actions.
. 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.
or a contract for deed.
passed a comprehensive law aimed at "foreclosure re-conveyance" practices in 2004, and Maryland
in 2005 was the first of at least 14 other states to adopt the Minnesota model for regulating these transactions. These 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.
Other laws regulating the activity of "foreclosure consultants" have been passed in California
, Georgia
, and Missouri
.
Additionally, state fraud
and unfair and deceptive trade practices laws may be applicable. The Truth in Lending Act
may also govern some transactions.
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.
Foreclosure rescue scheme
A foreclosure rescue scheme is a scam that targets those whose house is facing potential foreclosure. The scheme preys on desperate homeowners whose mortgages are in default by offering to prevent the foreclosure...
. Often considered a form of predatory lending
Predatory lending
Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...
, equity stripping became increasingly widespread in the early 2000s. In an equity stripping scheme an investor buys the property from a homeowner facing foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
and agrees to lease
Lease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
the home to the homeowner who may remain in the home as a tenant. Often, these transactions take advantage of uninformed, low-income homeowners; because of the complexity of the transaction, victims are often unaware that they are giving away their property and equity. Several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure re-conveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or unmeetable terms.
Term and definition
The term "equity stripping" has sometimes referred to 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. 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 bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s or national companies.
Alternate Uses
In addition to the fraudulent uses described here, the term "equity stripping" also refers to the asset protectionAsset protection
Asset protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments...
concept whereby the equity of an asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
is encumbered, or stripped, to frustrate collection efforts by unsecured creditors. This can be done to protect the assets of individuals or organizations in high-risk businesses (e.g. doctor
Physician
A physician is a health care provider who practices the profession of medicine, which is concerned with promoting, maintaining or restoring human health through the study, diagnosis, and treatment of disease, injury and other physical and mental impairments...
s) from losing equity in lawsuit actions.
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. However, with an increase in values, foreclosure rates also peaked in 2001 and remained high, leaving numerous foreclosed homeowners with substantial equity. With these trends, a market emerged to tap into this equity.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 foreclosed homeowners and make contacts personally, by phone, or through direct mailDirect mail
Advertising mail, also known as direct mail, junk mail, or admail, is the delivery of advertising material to recipients of postal mail. The delivery of advertising mail forms a large and growing service for many postal services, and direct-mail marketing forms a significant portion of the direct...
. 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 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 leaseLease
A lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. A rental agreement is a lease in which the asset is tangible property...
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
Several states have passed laws to prevent and/or regulate equity stripping schemes. MinnesotaMinnesota
Minnesota is a U.S. state located in the Midwestern United States. The twelfth largest state of the U.S., it is the twenty-first most populous, with 5.3 million residents. Minnesota was carved out of the eastern half of the Minnesota Territory and admitted to the Union as the thirty-second state...
passed a comprehensive law aimed at "foreclosure re-conveyance" practices in 2004, and Maryland
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
in 2005 was the first of at least 14 other states to adopt the Minnesota model for regulating these transactions. These 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.
Other laws regulating the activity of "foreclosure consultants" have been passed in California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, Georgia
Georgia (U.S. state)
Georgia is a state located in the southeastern United States. It was established in 1732, the last of the original Thirteen Colonies. The state is named after King George II of Great Britain. Georgia was the fourth state to ratify the United States Constitution, on January 2, 1788...
, and Missouri
Missouri
Missouri is a US state located in the Midwestern United States, bordered by Iowa, Illinois, Kentucky, Tennessee, Arkansas, Oklahoma, Kansas and Nebraska. With a 2010 population of 5,988,927, Missouri is the 18th most populous state in the nation and the fifth most populous in the Midwest. It...
.
Additionally, state fraud
Fraud
In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
and unfair and deceptive trade practices laws may be applicable. The Truth in Lending Act
Truth in Lending Act
The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...
may also govern some transactions.
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
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
. 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.