Housing Boom Boomerangs on Vulnerable Homeowners

With mortgage rates rising, home prices falling and consumers hampered by more credit card, auto and bank debt than ever, there has never been a more fertile time for scams that target homeowners.

A July 3 New York Times article put a face on the victims of the latest practice of “equity stripping.” In this home loan scam, homeowners who have fallen behind in their mortgage payments sign over the deed to their property — often unknowingly — in exchange for promises of immediate cash and the chance to retain their home.

Once these unscrupulous lending companies have the deed to the property, they borrow against the equity in the home, pocket the cash and patiently wait for the inevitable: the homeowner again falling behind in payments. As holders of the property deed, these predatory lenders are then able to foreclose. Armed with misleading advertising — and with an increasing number of homeowners seeking a quick fix for financial woes — these companies are successfully exploiting some of the most vulnerable members of our society.

The relentless pursuit of the American Dream — big house, multiple cars, a wallet full of credit cards stretched to the limit — has left millions of Americans poised on the brink of a financial disaster. It takes just one moment of misfortune: an illness, an elderly parent that needs financial assistance or the loss of a job to put these homeowners at risk of losing everything they have worked so hard to acquire.

Over the past 10 years, the housing boom has been a housing boon to those middle and lower-class strivers who have managed to scrape together down payments and qualify for mortgages. But while the housing market is slowing, credit debt and consumer spending are increasing. Many people have a frightening a lack of knowledge about the terms of their mortgage loans. They don’t take the time to understand alphabet soup of available financing options: ARMs, GPMs, APRs – not to mention “balloons,” “buy downs,” and “jumbos.”

As a result, when debt overtakes earning and dark terms like “foreclosure” become part of the vocabulary, most homeowners panic and seek what they believe to be the quickest, easiest solution to their cash flow troubles.

It’s hard for frantic homeowners not to be tempted by the slick marketing campaigns and smooth operators that offer them the promise of an easy way to save their home and repay their debt. It’s equally difficult to access the information that will help them to, at best, keep their home, or at least allow them to tread water financially while waiting for their situation to improve.

And while these scams are finally coming under the scrutiny they deserve, they are the inevitable outgrowth of fraudulent practices between appraisers and mortgage companies over the past 10 years. Inflated appraisals and unorthodox lending structures have added momentum to the downward spiral of the real estate market, creating an avalanche of foreclosures for first-time buyers, over-extended families, folks on a fixed income, and other vulnerable homeowners.

As an attorney who practices in Nevada, the leading state in the nation for foreclosures (as reported in "In Business Las Vegas," (www.inbusinesslasvegas.com), I’ve had too many people arrive in my office only after it’s too late for me to be of help. I get angry when I have to tell a retiree that I can’t stop the foreclosure on their condo because the loan company they deeded their home to has stripped the equity from the property and is waiting patiently for the homeowner to default on payments once they have drawn down their loan amount.

Or when I have to tell the single mother that has refinanced her home four times over the past two years — despite her poor credit history — that there’s no way to stop the foreclosure process unless she can continue to make the high monthly payments she was basically conned into thinking she could afford.

It’s this sense of outrage over the accessibility of basic facts necessary to make informed judgments that affirms why we must continue to strive to educate citizens about basic legal rights and terms. So, I’m taking this opportunity to share what I know to be true about preserving your equity and your home:

1. Understand the terms of your home mortgage loan. Invest the money up front for a lawyer to review and explain it to you, or use a reliable, competent real estate agent.

2. Stick with established mortgage companies with long histories of providing loans. Be suspicious of companies that are not licensed or offer too-good-to-be-true financing. Your local Better Business Bureau can help you research mortgage companies in your area.

3. Learn about mortgage scams to protect yourself; the Federal Trade Commission spells out these practices in simple terms on their website: www.ftc.gov or call them at 877-FTC-HELP

4. If you are confronted with a foreclosure situation, consult a lawyer when you first receive a notice of default. Don’t ignore the facts. If you expect your financial situation to resolve in the short term, you may be able to work out an agreement with your mortgage company. You may want to explore bankruptcy arrangements. You may choose to sell your home yourself, retain your equity and re-enter the housing market when you are financially stable once more.

I believe that educating the public is the best defense against fraud in any arena. To a desperate homeowner in this current volatile housing market, a deal that promises to get them out of debt and restore ownership in their homes may sound too good be true. And, like all successful frauds, the truth is: It is.

Robert Massi has been a Fox News legal analyst since 1998 covering high-profile court cases. He is the author of People Get Screwed All the Time: Protecting Yoursel from Scams, Fraud, Identity Theft, Fine Print, and More (Collins Books 2007.) and the host of a popular Las Vegas radio show that focuses on everyday legal issues, as well as a lawyer in private practice. In addition he has founded The Conscience of America, an organization dedicated to improving the way citizens are treated by the legal system.