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.
Even if the practice is under the radar, a June 2003 study by the Mortgage Bankers of America estimated that equity stripping and other predatory lending costs consumers $9 billion a year. Further, the study found that in the three months that ended when the report was issued, foreclosure rates were the highest rate in 30 years.
Two years ago, a woman named Denise Brantley contacted ACORN. Before then, the group had worked with victims of predatory lending, a more prominent practice than equity stripping. Predatory lenders use deceptive or aggressive sales tactics to set up unfair loan terms and complicated transactions that take advantage of borrowers. In the summer of 2002, there was only the slightest inkling that a new scam was being hatched.
"We had been hearing from people who were behind on their mortgage. They'd call and say someone had offered to buy their house," says Jordan Ash of ACORN. "We said, 'That doesn't seem to be a good idea.'"
But it wasn't until Brantley showed up with papers and numbers that the group realized they had a new problem on their hands. "We thought predatory lending was bad," Ash said, saying the foreclosure scammers show no remorse. "Equity strippers make [predatory lenders] look like angels."
Brantley's documents portrayed evidence of downright fraud, as well as real estate law violations. Brantley, a grandmother on disability after suffering a heart attack and a stroke, sold her home to Grant Holding, a St. Paul real estate investing company, with the understanding that she would buy it back later. Instead, unable to keep up with monthly payments that leapt from $607 to over $1,000, Brantley received an eviction notice in May of 2002. And she'd lost the $50,000 or so her house had in equity. Eventually she was kicked out of her St. Paul home.
Although Assistant Attorney General Cox says equity-stripping victims are a diverse bunch--from inner-city residents to suburbanites, poor to wealthy--many tend to be unfamiliar with real estate transactions, making them especially vulnerable. They may even be unaware of the significance of their own equity; the portion of a house that a homeowner owns (the value of a home minus the mortgage amount) is often an owner's main financial asset.
Powell agreed to take on Brantley's case when ACORN contacted him, even though he had never heard of equity stripping. He soon realized how complicated his task was--but it proved to be a benchmark case. Brantley's lawsuit was filed last October and a temporary restraining order against Grant Holding was issued, allowing Brantley to remain in her home. The parties entered mediation, and Brantley won the right to buy her house back for the $92,000 Grant bought it for.
(More recently, Ramsey County District Court Judge John Finley issued another restraining order against Grant Holding, prohibiting the company from filing papers dealing with deed transfers, evictions, and foreclosures in that county.)
Most victims are not as lucky as Brantley. "Even if the judge rules in their favor, they have to come up with the mortgage to buy it back," Ash says. "That's a huge barrier. A lot of people aren't able to do that."
There are other barriers. Housing court, usually the first step in the legal process after someone has been evicted, has little interest in determining anything other than whether the defendant is making rent payments. And lawyers are seldom involved in housing-court cases--making it all the more difficult for victims to find legal representation if they decide to prosecute.
The new law in Minnesota requires that the buyer does not charge more than 60 percent of income for monthly payments, that the buyer be able to prove that a homeowner will be able to buy the house back, and that, if a former homeowner still falls behind and fails to buy the home back, the former owner will receive 82 percent of the difference between the house's market value and the mortgage paid by the buyer.
Cox believes the law will both hinder the practice and make the cases easier to prosecute. The good intentions behind the law are clear. What's unclear, however, is what the unintended consequences will be.
"It remains to be seen how much the new law will help consumers," says St. Paul lawyer John Tancabel, who is representing Collins and several others in equity-stripping cases. Tancabel points out, for instance, that there's no fixing bad credit after homeowners have been duped. "The law contains some provisions which will definitely help some consumers in foreclosure, but contains other provisions which will provide little protection."
And equity stripping is nebulous enough that some investors maintain they're on solid legal--and even ethical--ground. Tom Kolar of Capital Lending, which bought Collins's house for $165,000 and charged her $1,475 per month to live in it, praises the law, and says he hopes it will erase the stigma he says he faces because of a few unscrupulous people. (Collins had paid $1,052 monthly on her mortgage.) Kolar maintains that investors give people an opportunity they wouldn't have otherwise.
"The fact of the matter is, [Collins] would've been out on the street," Kolar says. "Without people like us, they will lose their homes."
But even with Kolar's proclaimed magnanimity, there's a huge price to pay. What investors don't say, contends Becky Gomer, ACORN's head organizer, is that homeowners are often financially better off with their equity than with the opportunity to lease their home. Most equity-stripping victims lose tens of thousands of dollars in equity.
Meanwhile, Collins's case remains unsettled, and only chipping paint and crumbling steps indicate the havoc inside her house. A friend rescued the family from the streets the day of the eviction, paying for a hotel for the weekend. But afterward, Collins says the family returned to find the home cleared of most belongings, although the family maintains residency thanks to a judge's order. The house is now furnished with old mattresses and broken furniture recovered from neighbors' trashcans.
As she waits for her trial in November, Collins considers herself lucky to have a lawyer and a place to live, at least temporarily. But because of the legal loopholes and uncharted territory that equity stripping broaches, the house could still slip through her hands.
"We have nothing besides our house," Collins says. "I'm hoping and praying to God we don't lose that."
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