Jeff and Donna Rundgren were the perfect marks. A grizzled, 40-year-old high school dropout, Jeff struggles with reading. Donna, 45, has soft features and a tendency to trust strangers. In 2002, Jeff was injured in a car accident, missed six months of work, and wound up owing tens of thousands of dollars in hospital bills. Over the next couple of years, Donna battled breast cancer and emphysema, leaving her with hefty medical debt as well. Before long, the north Minneapolis couple fell behind on their mortgage. By early 2005, they were facing foreclosure.
That's when they started getting letters and phone calls—as many as 50 a day—with offers of help. In that avalanche, Joshua Schultz's letter stuck out. It wasn't the same old sales pitch, and the Rundgrens were intrigued.
On a spring day in 2005, the young man in a business suit visited their two-story home on Dupont Avenue. Schultz made his pitch: All they'd have to do, he explained, was sign over the house to a couple of investors he'd lined up to take on their mortgage. The Rundgrens would make their monthly payments to Schultz. Within two years, he'd have their credit repaired, and they'd be able to buy back the house.
Schultz told the hopeful couple that he'd get back to them soon. And after calculating that their house was worth about $70,000 more than what they owed the bank, he called them with the good news: They qualified for his help.
In May 2005, the couple met with Schultz and his associates in the company's Burnsville office, where the Rundgrens signed over the title to the house.
It wasn't long before the couple realized they'd made a mistake. Schultz and his associates charged the couple $22,250 in consulting and service fees, as well as a few thousand more in other closing costs. Another $31,000 went to the investors.
When the couple received their first monthly bill, it was for $1,148—quite a bit more than the $900 Schulz had promised, they say. Donna immediately called Schultz to complain, she says. Schultz told her the bill was only that high because their credit was bad, and that it would soon go down.
The couple started making partial payments, sending in two checks a month. It was the only way they could manage, Donna says. But after about four months, Schultz told them he wanted monthly payments or nothing at all.
"That's when I started freaking," Donna recalls.
Schultz claims he told the Rundgrens about the $1,148 monthly payments before the closing. "I find it very odd that these people were in the home for a year or more and when something comes up where they can't pay, all of sudden we're the bad guy and didn't explain everything right," he says.
But the Rundgrens aren't alone in their complaints: Schultz faces lawsuits from several of his old clients, and his company has since gone belly-up.
What happened to the Rundgrens has the hallmarks of a shady lending practice known as "equity stripping." In typical cases, the equity stripper buys the house, charging exorbitant fees at closing, then leases it back to the homeowners with the assurance that they will eventually be able to buy it back. Instead, with the monthly lease set prohibitively high, the homeowners fall behind on their payments and get evicted, losing whatever equity they had in the home.
The practice grew out of the "house flipping" rage in the late 1990s, and came into vogue in 2002, as foreclosures edged upward and housing prices skyrocketed. By 2003, hundreds of families in the Twin Cities had lost their homes to equity stripping.
"It is a fairly lucrative business opportunity that makes money on the backs of people's misfortunes," says Dan Tyson, a lawyer who was among the first to represent victims of equity stripping.
In 2004, Minnesota was the first state in the nation to enact a law aimed at stopping equity stripping. The law banned deals designed to make homeowners fall behind on payments, and guaranteed that homeowners would get to keep at least 82 percent of the equity if they lost their house to foreclosure.
"Minnesota has the best set of [equity-stripping] laws in the country," says Prentiss Cox, a professor at the University of Minnesota Law School who was the law's main author. "I think we've done the best job of controlling it."
Indeed, Minnesota's law served as a blueprint for similar statutes enacted in Illinois, Maryland, New York, and Rhode Island.
But it hasn't made the problem go away. The most creative equity strippers have found a loophole: They simply move the homeowners into another house.
"It's like having cockroaches in your house," says Leah Weaver, a Legal Aid of Minneapolis attorney who specializes in equity-stripping cases. "You see how they're getting in and block up the hole. Then they figure out another way to get in. Then you block that hole."
Some equity strippers ignore the law altogether, confident that their victims will be too embarrassed to ask for help, says Darielle Dannon, a housing law attorney at the Volunteer Lawyers Network.
"There is a lot of shame with people even when they do come forward," says Dannon, who estimates that only one in 20 victims seeks legal assistance. "They've been scammed out of their home and money. A lot of people don't even tell their friends and family. It's really hard to get people to call."
With foreclosures rising in the Twin Cities and beyond—the metro area alone is on pace for 6,000 foreclosures this year, nearly six times as many as three years ago—there are more potential victims than ever. But with housing prices stalling, it's likely that fewer troubled homeowners will have significant equity to be stripped. "I don't know which outweighs the other," says Cox.
But that doesn't help couples like the Rundgrens. On a recent day, Donna showed a new acquaintance her home. She has planted flowers all around the exterior, as well as a garden with tomatoes, peppers, and chives. Standing in her homey living room, Donna pointed with pride to the freshly painted walls. The living room's hardwood floors are another matter. They are badly scratched, and Donna says she won't be refinishing them until she knows whether she'll be staying in the house.
After several months of making payments to Schultz and being charged what they say were unjustified late fees, the Rundgrens fell behind. Once again facing foreclosure and the threat of eviction, the Rundgrens found their way to Legal Aid. "We were both on the verge of tears when we went there," says Donna.
Legal Aid referred them to a lawyer willing to take their case free of charge. In January, the Rundgrens filed a lawsuit against Schultz and his associates, demanding back the title to the house and the money the couple paid in fees. The couple's lawyer is optimistic about their chances, but unless they reach a settlement, the case promises to drag on for months. Even if they win, there's no guarantee they'll be able to stay in their home.
"This is the house where we've been through everything," Donna says. "To lose it, I can't even bear the thought of it."