Home Equity Fraud
Before signing on the dotted line, it's important to learn about and recognize the warning signs of the two most common types of predatory lending: equity stripping and equity flipping.
Home Equity "Stripping"
Banks and other lenders are in the business of making large profits on the money you borrow for your home. That's just business, but some unscrupulous financial organizations may encourage you to leverage yourself beyond your means. Also known as home equity liquidation or collateral stripping, there are many terms for the same thing: taking cash out of your home. If you have trouble making monthly mortgage payments, applying for additional credit against your home is not a good idea.
It's referred to as equity stripping partly because the lender will take away your home and strip you of all the equity you have built. Here's a good rule of thumb: If a lender tries to talk you into falsifying information, such as the source of your down payment, or exaggerating your income to qualify for a larger loan, it's time to get another lender. You have invested in real estate for the long term, and so should your lender.
Home Equity Lines of Credit (HELOCs) are one of the most widely used forms of equity stripping. This is an attractive option to get the cash you need - particularly since the interest is tax-deductible -- but it is important to know how much borrowed money you can afford and at what rate. Before you take money out, consider your alternatives, which include a traditional second mortgage or a low-or-no-interest account from a credit card company. One recent HELOC shopper found that a 0% APR for 12 months from a reputable credit card company was the perfect solution for the new roof she needed.
There are many good reasons to take money out of your greatest asset -- home improvements, your children's education, starting a business -- but knowing what you can afford and not being pressured into over-extending yourself is key.
Home Equity "Flipping"
What "churn" was in the '80s and '90s stock market boom, "flipping" is to the current surging home loan business. Just as stock brokers were happy to keep buying and selling your stocks (since they were getting a commission on every purchase and sale), the lenders who encourage their customers to flip their existing home loan (even though the customer may have a more favorable rate currently - and for a shorter loan period) take points and fees for themselves. This adds up to higher interest rates and an even larger loan amount for you.
Since lenders make money on transactions, some lenders will try to convince you that you are getting a better deal by refinancing over and over. They will also use turns of phrase like "Let your home start working for you." The problem is that these flipping tactics are loaded with fees and hidden terms. In most instances, the real winner is the lender. This scheme is more insidious than most, as the full financial impact of this constant "flipping" is not felt right away - sometimes not until you have been refinanced out of your home.
Reporting Possible Fraud
If you suspect fraud, inform your lender. File a complaint with your state Attorney General's office or state banking regulatory agency, and the Federal Trade Commission (FTC). Contact them online at http://www.ftc.gov or by phone at 1-877-FTC-HELP (1-877-382-4357).
The Federal Trade Commission has provided these helpful articles to help you identify fraud and identity theft:
- Tips on Selecting a Real Estate Professional: http://www.ftc.gov/bcp/co ... state.htm
- Types of Mortgage Fraud: http://www.ftc.gov/bcp/co ... tgage.htm
- Avoiding Home Equity Scams: http://www.ftc.gov/bcp/co ... scams.htm
- Fighting Back Against ID Theft: http://www.ftc.gov/bcp/ed ... s/idtheft
- Last edited October 12 2012
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