What is Equity Skimming?

What is Equity Skimming?
Equity Skimming is the term that is usually applied to a kind of scam that involves the exercise of buying residential properties from those who have defaulted on their mortgage payments or other real estate taxes and using the rental income derived from these for personal benefits instead of using them towards the payment of mortgages or other real estate related expenses. This is also known as equity stripping or foreclosure rescue. This practice is aimed at the vulnerable and low income group house owners in the USA. This malpractice began to take form in the early 2000 and is often carried out by small investment companies who take away these real properties from foreclosed home owners and in turn allows the latter to stay in that property as a tenant. In most of the cases, these vulnerable and poor owners are duped into handing away their properties to these rescue artists as they are unaware of the complexities of the procedures. To combat these, many states today are coming up with ‘foreclosure reconveyance schemes’ which can be effective and beneficial for the people. Nevertheless, very often such schemes come with extremely difficult terms and conditions which make them inaccessible to the common man.

What are the conditions that are responsible for this fraud?
The key reason for the rise of this sort of scam is the latest trend in the United States economy. The real estate values in the USA has increased dramatically from 2000 to 2005; with this tremendous rise in the values, the foreclosure rates also soared in 2000-2001 and continued to remain very high. This obviously led to an increased number in foreclosures and the foreclosed homeowners with significant equity. To exploit this trend, equity skimming came into being.

What are the factors that constitute to this scam?
Foreclosure:
When a home owner defaults on his payments, he enters into a foreclosure. These foreclosure notices are generally published in the news dailies or even distributed by various reporting services to small investors and rescue artists. At times, the foreclosed land owners also contact creditors to enquire about refinancing options.

Solicitation:
At times the investors as well the rescue artist gather information about the foreclosed home owners and establish contacts personally, by telephone and even by emails. These people offer a ‘miracle refinancing’ option to the unaware home owners and assure them that they can save the property from foreclosure.

Acquisition:
These rescue artists arrange the closing of the loan (they mostly delay the date and announce an abrupt closure to create urgency). During the closing, the home owner transfers the title to the rescue artist. The latter then pays off the debt and acquires the deed. The property is then given to the owner in the form of a lease or contract for deed.

Result:
The uninformed homeowners continue to live in those properties paying rent or contract for deed payments (in most cases these rates are much higher than their previous mortgage payments). With the course of time, they predictably start defaulting and eventually forced out of their homes with very less equity.

Remedies:
Many states have passed laws to stop these equity stripping schemes. States like Maryland and Minnesota passed laws in the year 2005 that was aimed at “foreclosure reconveyance” practices. These laws require adequate disclosures, capped fees and an ability to pay on behalf of the user. These laws also prohibit few delusory and unjust methods that are usually associated with equity stripping. Other states like Missouri, California and Georgia have also passed regulations that can monitor the activities of “foreclosure consultants”. Besides these laws, the state ‘fraud’ and ‘unfair and deceptive trade practices’ act can be used against those creditors who have tried to mislead their consumers.