|Borrower beware: Bad home equity
loan can lead to foreclosure
Stripping. Flipping. Packing. They
go by many names. But whatever they're called, the deceptions, predatory
lending scams and outright frauds are going on in the home equity
Borrowers need to tread carefully
when they look to tap their greatest asset for cash. Though home
equity loans and lines of credit can help improve people's finances,
the bad ones can easily lead to foreclosure. And with hundreds of
companies bombarding people's answering machines, mailboxes and
even front doorsteps with solicitations every day, uneducated homeowners
may find themselves the next vulture's victim.
"They're greedy, they're greedy," said Nina
Simon, senior attorney with the American
Association of Retired Persons Foundation, which works on behalf
of elderly people who have been scammed.
"They're very profitable and they don't care.
I just don't think anybody cares," she added. "They've kept pushing
the envelope because they're making money."
Financial fraud is, sadly enough, as American as baseball and
apple pie. Pump-and-dump stock trading plans, identity theft and
other ways of separating people from their money make the headlines
day after day.
Yet home equity scams are among the most egregious
because they pick much more than a person's wallet. Often, victims
lose their savings, their dignity and homes that represent the life's
work of long-deceased spouses who can't protect them anymore. Experts
say the vacant properties left behind after foreclosure enhance
crime and neighborhood blight, too, especially in the urban areas
frequently targeted by equity predators.
"Maybe it's just human nature. Maybe it's American
culture. But it's something about the home and hearth," said Matthew
Lee, executive director of Inner
City Press, a Bronx-based consumer advocacy group that monitors
banking and lending practices. "It goes to where you live ... and
taking your house is a fairly fundamental act."
While home equity scams come in many shapes, a handful of majors
are the most important to avoid. First and foremost is "stripping,"
in which lenders make loans that they know borrowers can't repay.
They do this because they want to foreclose on the homes and sell
them, thereby "stripping" away the home equity for their own profit.
They get consumers to agree to these mortgages by pitching them
as debt consolidation tools or a way to fund home repairs.
"There are two philosophies on why you're lending.
Are you lending on their ability to pay or are you a collateral
lender ... relying less on the income and more on the collateral
to make payments on the loan?" said Bill Matthews, managing director
Asset Research Institute Inc. of Reston, Va. The firm tracks
mortgage fraud for financial company clients.
With "stripping" lenders, "they're usually relying
on unsophisticated borrowers, where they may have built up a significant
amount of equity in their home, but they may have a lot of credit
card or auto loan debt."
Some unscrupulous lenders will take the process a step further
and develop an ongoing revenue stream out of stripping victims by
"flipping" their original loans several times. These companies make
their offers sound attractive because they are agreeing to refinance
their customers' mortgages rather than foreclosing on them. But
because they tack on exorbitant fees with each transaction -- and
almost invariably roll those charges into the new mortgages -- they
actually increase borrower debt burdens rather than reduce them.
"It's sort of bleeding somebody dry," said Lee.
To add insult to injury, predatory lenders will often "pack"
charges for credit life insurance, regular life insurance and other
added "services" into the new mortgages. Many of these policies
are either unnecessary or designed not to pay out no matter what
the circumstances, experts say, leaving borrowers on the hook for
even more money.