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Equity Stripping

posted by Oren Bar-Gill

Today’s New York Times Business Section includes an interesting article on equity stripping: “Predators Bilk Struggling Homeowners” by Gretchen Morgensen and Vikas Bajaj.  The article explains how sophisticated predators target desperate homeowners and steal the equity that they have in their homes:

“The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes.”

These schemes, which are attracting the attention of regulators, pray on the imperfect rationality of distressed homeowners.  First, they exploit myopia by offering short-term benefits, while downplaying future risks.  Second, they hide the true costs and benefits of this complex transaction in lengthy incomprehensible form contracts. 

But, most importantly, these fraudulent schemes are driven by simple lies: Knowing that their targets will not read the contracts and would not understand them even if they did try to read, the predators blatantly mischaracterizing the transaction in the representations they make to homeowners.

Worth a read.

Comments

I second Oren's comments. The article is well worth reading, especially for those who want to rely on disclosure to solve problems of consumer fraud.

This is a perfect parable for the entire USA: we are giving the deed to our entire economy and nation to crooks who promise to fix our financial affairs but all they are doing is loading up everything with debts

I saw those folks at work in El Paso ten years ago. Then, the UST was interested in rooting them out. They have moved on to more important things today -- like the fraud that debtors commit when they file for bankruptcy. So much for consumer protection.

The tactic in El Paso was pretty simple: deed over your house and then rent it from us, while we locate a new financer. The rest, as you can imagine, was history.

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