« In the Monday News Bin | Main | Over and Over Again »

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.

The comments to this entry are closed.

Contributors

Current Guests

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF