Borrower beware: Bad home equity loan can lead to foreclosure
By Michael D. Larson • Bankrate.com

Stripping. Flipping. Packing. They go by many names. But whatever they're called, the deceptions, predatory lending scams and outright frauds are going on in the home equity industry.

Borrowers need to tread carefully when they look to tap their greatest asset for cash. Though home equity loans and lines of credit can help improve people's finances, the bad ones can easily lead to foreclosure. And with hundreds of companies bombarding people's answering machines, mailboxes and even front doorsteps with solicitations every day, uneducated homeowners may find themselves the next vulture's victim.

"They're greedy, they're greedy," said Nina Simon, senior attorney with the American Association of Retired Persons Foundation, which works on behalf of elderly people who have been scammed.

"They're very profitable and they don't care. I just don't think anybody cares," she added. "They've kept pushing the envelope because they're making money."

All-American fraud
Financial fraud is, sadly enough, as American as baseball and apple pie. Pump-and-dump stock trading plans, identity theft and other ways of separating people from their money make the headlines day after day.

Yet home equity scams are among the most egregious because they pick much more than a person's wallet. Often, victims lose their savings, their dignity and homes that represent the life's work of long-deceased spouses who can't protect them anymore. Experts say the vacant properties left behind after foreclosure enhance crime and neighborhood blight, too, especially in the urban areas frequently targeted by equity predators.

"Maybe it's just human nature. Maybe it's American culture. But it's something about the home and hearth," said Matthew Lee, executive director of Inner City Press, a Bronx-based consumer advocacy group that monitors banking and lending practices. "It goes to where you live ... and taking your house is a fairly fundamental act."

Stripping
While home equity scams come in many shapes, a handful of majors are the most important to avoid. First and foremost is "stripping," in which lenders make loans that they know borrowers can't repay. They do this because they want to foreclose on the homes and sell them, thereby "stripping" away the home equity for their own profit. They get consumers to agree to these mortgages by pitching them as debt consolidation tools or a way to fund home repairs.

"There are two philosophies on why you're lending. Are you lending on their ability to pay or are you a collateral lender ... relying less on the income and more on the collateral to make payments on the loan?" said Bill Matthews, managing director at Mortgage Asset Research Institute Inc. of Reston, Va. The firm tracks mortgage fraud for financial company clients.

With "stripping" lenders, "they're usually relying on unsophisticated borrowers, where they may have built up a significant amount of equity in their home, but they may have a lot of credit card or auto loan debt."

Flipping
Some unscrupulous lenders will take the process a step further and develop an ongoing revenue stream out of stripping victims by "flipping" their original loans several times. These companies make their offers sound attractive because they are agreeing to refinance their customers' mortgages rather than foreclosing on them. But because they tack on exorbitant fees with each transaction -- and almost invariably roll those charges into the new mortgages -- they actually increase borrower debt burdens rather than reduce them.

"It's sort of bleeding somebody dry," said Lee.

Packing
To add insult to injury, predatory lenders will often "pack" charges for credit life insurance, regular life insurance and other added "services" into the new mortgages. Many of these policies are either unnecessary or designed not to pay out no matter what the circumstances, experts say, leaving borrowers on the hook for even more money.