Stripped Clean

Everyone's trying to figure out what makes equity stripping illegal. Misty Collins just wants her house back.

Misty Collins stood on a street corner one Friday last fall, with her five children, with no place to go, near the home she'd lived in for seven years.

The house stood in a prime real estate location, in a middle-class neighborhood surrounded by parks and bike paths and old-growth trees. It had served as the site of countless birthday parties and headquarters for extended family outings to nearby Lake Nokomis.

"It was so nice I couldn't believe it," Collins, age 33, says. "And I accomplished this on my own. A young African American woman on her own. I was the talk of everybody. I did it, in this neighborhood. I was the first person ever to have a house besides my grandma."

But Collins no longer owns the home; her family was evicted that fall Friday. She blames equity stripping, a scam virtually unheard of just a few years ago that's rapidly become prevalent in the Twin Cities and nationwide.

The dispute over who owns the house is scheduled to go to trial in November. It's unclear whether hers is a full-blown case of equity stripping--Prentiss Cox, an assistant in the Minnesota Attorney General's Office, says several elements of the case are similar to equity stripping instances that have been prosecuted here, and some are different--but it illustrates just how far-reaching and shady the practice has become.

These days, the potential equity-stripping cases that have passed through the court system number in the hundreds, and lawyers think those represent just a fraction of the victims. It's impossible to determine exactly how many people have been wronged, lawyers and housing advocates say, because so few end up getting help or going to court.

State legislation scheduled to go into effect in August aims to end the problem, but there will certainly be more victims before then. Meanwhile, lawyers wonder how effective the new law will be.

What's equity stripping? Sometimes referred to as "foreclosure rescue scam," it usually works in one of two ways: An investor seeks homeowners in foreclosure and buys their house for a price far less than market value, often for the amount owed on the mortgage. The scammer promises the former owners they will be able to buy the house back, allowing them to lease at a much higher cost than their mortgage payments. But as soon as the payments fall short, the dwellers are evicted, and they lose the option to buy back the house.

Or a lender offers to refinance if the homeowner signs a deed of property to the lender. Sometimes, in the worst cases, lenders trick homeowners into signing over their deed under false pretenses. Often, the lender will sell the home to a third party, who in turn evicts the tenants when payments fall behind. The original homeowner still has to make payments on the mortgage.

Equity strippers ensure that their new renters will violate their leases, usually by making monthly payments unaffordable, says Karl Oliver, a St. Paul lawyer who is currently representing several clients who have lost their homes.

"They'll let them get behind in their payments, and then they'll say, 'We need it now.' Once they're evicted, the scammer gets all the equity," Oliver says.

And it's highly profitable. On a home worth $200,000 with a $100,000 mortgage, for instance, Oliver says a scammer could make an $80,000 profit--after paying for the mortgage, and charging rent. (They use the rent to pay interest on the loan.)

That's what Collins says happened to her--and to countless others.

 

"Dear Friend, We heard that you are currently experiencing financial difficulties--but today could be your lucky day!"

"Foreclosure is stressful and full of uncertainty and we want to help you."

"There still maybe [sic] time to help you stop the foreclosure process. We offer you a simple solution--we pay cash for houses."

It's easy for potential scammers to target homeowners--the first step in the foreclosure process is listing the property in an advertisement. And in the past few years, there have been an unprecedented number of those ads in the legal notices sections of the St. Paul Legal Ledger, Finance and Commerce, and weekly newspapers.

As soon as a foreclosure ad is posted, the barrage of solicitation letters--and phone calls, and door-knocking--begins. All promise help, understanding, and solutions.

Lawyers and housing advocates believe economic factors recently aligned in the Twin Cities to create an environment ripe for scamming. Median home prices skyrocketed from $188,900 in June 2002 to $201,500 in June 2003--the first time the median price hit the $200,000 mark. A stagnant economy simultaneously boosted the local unemployment rate; claims for jobless benefits have risen steadily in recent years. The result: The number of foreclosures escalated, jumping 10 percent from 2001 to 2002.

The problem became so widespread that ACORN, a nonprofit that provides housing counseling to low-income families, and the state attorney general's office lobbied for tougher laws to stop the trend. At first glance, the bill, which passed the state House and Senate with one single nay vote (from Republican Rep. Eric Lipman of Lake Elmo) this past session, seems to live up to its reputation as the most comprehensive in the country. In Colorado, for example, the attorney general's office has prosecuted equity strippers. But in most cities, it's unheard of, and few states have any sort of preventive measures on the books.

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