Home Equity Scams

If you're a homeowner, you probably receive lender's phone calls, mails etc. There are also numerous tempting offers encouraging you to tap into the equity in your home. 

Certain lenders target homeowners who are elderly or who have low incomes or credit problems, then take advantage of them with deceptive practices, including disguising the fact that they are using their home as collateral for a loan. You could lose your home and your money if you borrow from crooked lenders who offer you a high-cost loan based on the equity you have in your home.

Have a look on the most common abusive lending practices: 

1. Equity Stripping: This is where the lender gives you a loan, based on the equity in your home, not on your ability to repay which is based on your income. As soon as you fall behind on the monthly payments, the lender can foreclose-taking your home and stripping you of the equity you have spent years building.

2. Deceptive Loan Servicing: The lender doesn’t provide you with accurate or complete account statements and payoff figures. That makes it almost impossible for you to determine how much you have paid or how much you owe. You may pay more than you owe. 

3. Credit Insurance Packing: At your mortgage closing, the lender gives you papers to sign that include charges for credit insurance or other benefits that you didn’t ask for and don’t want. If you object, the lender may tell you that if you want the loan without the insurance, the loan papers will have to be rewritten, that it could take several days, and that the manager may reconsider the loan altogether. If you agree to buy the insurance, you’re really paying extra for the loan by buying a product you may not want or need. 

4. Mortgage Servicing Abuses: After you get a mortgage, you receive a letter from your lender saying that your monthly payments will be higher than you expected. The lender says that your payments include escrow for taxes and insurance even though you arranged to pay those items yourself with the lender's okay. Later, a message from the lender says you are being charged late fees. But you know your payments were on time. Or, you may receive a message saying that you failed to maintain required property insurance and the lender is buying more costly insurance at your expense. Other charges that you don't understand-like legal fees-are added to the amount you owe, increasing your monthly payments or the amount you owe at the end of the loan term. The lender doesn't provide you with an accurate or complete account of these charges. You ask for a payoff statement to refinance with another lender and receive a statement that's inaccurate or incomplete. The lender's actions make it almost impossible to determine how much you've paid or how much you owe. You may pay more than you owe. 

5. Bait and Switch: The lender offers one set of loan terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction. 

6. Hidden Loan Terms (The Balloon Payment): You've fallen behind in your mortgage payments and may face foreclosure. Another lender offers to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. Look carefully at the loan terms. The payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end of the loan term, the principal-that is, the entire amount that you borrowed-is due in one lump sum called a balloon payment. If you can't make the balloon payment or refinance, you face foreclosure and the loss of your home. 

7. Loan flipping: This is where a lender encourages you to repeatedly refinance your loan and borrow more money. Each time you refinance, you pay additional fees and interest points and your interest rate has gone up. You have some extra money, but you also have a lot more debt stretched out over a longer period of time. With each flip of the loan, you've increased your debt. If you get in over your head, you could lose your home. 

8. The home improvement loan: A contractor knocks on your door and offers to put on a new roof or remodel your two bathrooms. The contractor tells you they can arrange financing through a lender. You agree and the contractor starts work. Later, the contractor gives you papers and tells you the job will be halted unless you sign them. Unbeknownst to you, you have agreed to a home equity loan, with high points, fees and interest. To make it worse, you're not happy with the work being done and the contractor, now that he has your signature, is not showing up for work every day. 

9. Signing over your deed: Sometime when you desperately need cash flow for mortgage payments a lender may ask you to deed your property to him before he can help you, claiming that it’s a temporary measure to prevent foreclosure. The promised refinancing that would let you save your home never comes through and once the lender has the deed to your property, he starts to treat it as his own. He may borrow against it (for his benefit, not yours) or even sell it to someone else and because you don’t legally own the home any more, you won’t get any money when the property is sold, regardless of your equity. The lender will treat you as a tenant and your mortgage payments as rent and if your rent payments are late, you can be evicted from your own home.

10. Subprime Loans: Subprime loans have become a significant and growing part of the home equity market. Subprime lending refers to the extension of credit to higher-risk borrowers, at rates of interest and fees higher than conventional loans. Some companies have made home equity loans to minority, elderly, and low-income borrowers at interest rates as high as 20-24 percent. As a general rule, loans made to individuals who do not have the income to repay such loans usually are designed to fail; they frequently result in the lender acquiring the borrower’s home equity. The borrower is likely to default, and then ultimately lose her home through foreclosure or by the signing over of the deed to the lender in lieu of such a measure.

The FTC suggests if you’re thinking about using your home as collateral for a loan, be careful. Unless you can make the loan payments out of current income, you could lose your home as well as the equity you’ve already built up.

You can protect yourself against losing your home to inappropriate lending practices by keeping these points into consideration:

Do's:

• Do ask specifically if credit insurance is required as a condition of the loan. If it isn't, and a charge is included in your loan and you don't want the insurance, ask that the charge be removed from the loan documents. If you
  want the added security of credit insurance, shop around for the best rates.
  
• Do keep careful records of what you've paid, including billing statements and canceled checks. Challenge any charge you think is inaccurate.
  
• Do check contractor's references when it is time to have work done in your home. Get more than one estimate.
  
• Do read all items carefully. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member or an attorney. Consider all the costs of financing before you agree to a loan.

Don'ts:

• Don't agree to a home equity loan if you don't have enough income to make the monthly payments.
  
• Don't sign any document you haven't read or any document that has blank spaces to be filled in after you sign.
  
• Don't let anyone pressure you into signing any document.
  
• Don't agree to a loan that includes credit insurance or extra products you don't want.
  
• Don't let the promise of extra cash or lower monthly payments get in the way of your good judgment about whether the cost you will pay for the loan is really worth it.
  
• Don't deed your property to anyone. First consult an attorney, a knowledgeable family member, or someone else you trust.
  

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