An older neighbor was remarking how expensive home prices have become.
“I don’t know young kids can afford a home today,” she said. “I’d be helping our grand-daughter had I not been hit by equity skimming a few years ago.”
While a ton of mortgage fraud spiked during the mortgage meltdown 10 years ago, a common target for decades has been older people wanting to sell their home and move to a smaller space or a facility that better accommodates their needs. And, the value of their home often is their only asset.
One of the challenges with equity skimming and other forms of criminal fraud is that it is difficult to prove in court. In most cases, intent to defraud must be proven at the time the deal was made.
One purchasing scheme, sometimes referred to as basic rent skimming, involves older homeowners who need to sell, can’t find buyers and attempt to move on by deeding the property to an investor who would assume the payments on the original loan. The investor then rents the property and never makes payments on the loans. When the lender eventually begins foreclosure proceedings, the original owner is targeted because the investor never paid the loans. The investor pockets the rent money and/or the down payment or security deposit. While due-on-sale clauses have curtailed the practice, random incidents still are being reported.
Some states have introduced legislation that deals specifically with equity skimming where such acts are punishable as a felony, not unlike securities fraud. Securities fraud is regulated somewhat differently than criminal fraud. Prosecutors believe securities violations are easier to prove because a person does not have to affirmatively lie in order to be criminally liable for his actions. Simply not providing full disclosure could be a violation.
However, other states have not been as vigilant on equity skimmers. Scammers land there because there’s not much to lose – present laws haven’t put them in jail and financial penalties haven’t served as much of a deterrent.
Until the national mortgage meltdown 10 years ago, most foreclosures occurred only when a major problem hit the borrower – serious injury, divorce, loss of job, etc. Credit checks and qualification procedures were designed to sort out those capable of assuming the responsibilities of a home loan. When qualification measures were lessened (some would argue dropped altogether), the easy money came back to haunt.
Some foreclosures, however, were sparked by the deliberate actions of fast-talking salespeople not associated with established banks, savings and loans or insurance companies. Typically, their aim was to take the equity out of a seller’s home, a residence owned free and clear by an older person.
In another popular residential scheme, a buyer would give the seller a sizable down payment. The seller then would agree to carry a second mortgage for the balance of the purchase price. Once in possession of the trust deed to the property – which gives the buyer title – the crafty buyer would go to a lender and mortgage the property again, putting the lender “in first place” if the buyer defaults on the loan. The total of the loans then exceeded the market value of the house.
The buyer recovers his down payment money from the cash raised in the new mortgage, pays commissions and closing costs, pockets the balance and defaults – or makes no payments – on the loan. The lender eventually forecloses on the property to collect the cash the buyer owed on the loan.
The sellers never see the money promised in the second mortgage and now must pay the lender the balance of the loan just to get the house back. In effect, the sellers have given up their home for a down payment. One case involving 12 properties in the Eugene, Oregon, area wasn’t discovered until long after a smooth-talking 30-year-old left the state with $184,000 in cash.
Again, the most difficult and frustrating aspect of the entire scenario is it is difficult to prove there was intent to defraud at the time the deal was made.
Mortgage fraud is not on the uptick. However, be wary of investors willing to take over your payments or attempting to persuade you to subordinate your position on a loan.
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