Beware of the home equity stripping scam!

The market for home equity loans and mortgage refinancing has been booming during the last five years. This increase in lending can be attributed to favorable interest rates and the aggressive pursuit of home loan customers by banks that aren’t investing in tech stocks anymore. The combination of agreeable lenders and low interest rates are certainly good for anyone seeking a home loan. Those considering borrowing against their equity should also be aware that the increased market for refinancing has led to fierce competition among those who offer home loans. And when the competition increases, so does the incidence of loan scams.

Lenders are pretty aggressive these days. It is not unusual to have a knock on your front door from someone who asks you if you are interested in either selling or refinancing your home. It’s terrific to meet a lender who wants to provide you with a home loan, provided that you are actually interested in obtaining one. If you are, you should be careful and take your time to research your lender thoroughly, rather than accept a deal from someone who knocks on your door or calls you out of the blue on the telephone.

A common scam in the home loan market today is one known as “equity stripping.” In an equity stripping scam, a homeowner applies for either a home equity loan

 or a refinanced mortgage. An oh-so-friendly lender then encourages the homeowner to borrow more money than the homeowner can afford. Perhaps the lender will even “assist” by providing some not-quite-honest information on the loan application. The lender isn’t being helpful; they are interested in having the homeowner default on the loan. Should the homeowner default, the lender can take the home through foreclosure. Once that happens, the lender can sell the home and pocket the profits. This scam is quite often helped by another scam - that of appraisal fraud. Lenders have been pressuring home appraisers to deliver appraisals that meet “target” prices. If a lender is interested in lending based on a home value of $200,000, then the lender expects the home to appraise for at least that amount. Appraisers who fail to provide the “expected” values will find themselves with less and less work.

The equity stripping scam is one of many scams that are currently rampant throughout the lending industry. It can be avoided, however, if those seeking home equity loans would take the time to investigate their lenders and do a bit of research prior to signing their paperwork. Homeowners who are interested in refinancing their home should thoroughly check out their lenders before doing business with them. A good idea would be to talk to friends who have recently refinanced their homes or to contact the local Better Business Bureau or Chamber of Commerce to inquire as to whether they have had any complaints about that particular lender. Lenders who “cold call” or knock on your door out of the blue are probably best avoided.