Aleem Morris signed over his home in a complex arrangement. With the housing market in decline, financial predators are finding yet another way to take advantage of people who fall behind on their payments.
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.
There are no nationwide numbers on this common fraud, known as equity stripping, but it has turned up in almost every state. Seven states have passed laws to try to stop it. Still, with foreclosure rates rising rapidly, it will be a growing problem, consumer advocates say.
“Conditions now are perfect for these scams,” said Lauren K. Saunders, managing attorney at the National Consumer Law Center in Washington. “We are at the end of a period of rising real estate prices, so a lot of people have equity in their homes. But we also have a foreclosure crisis.”
Gloria and Fred Johnson fell for a sales pitch that they now regret. They had secured their version of the American dream — a home of their own — in the Bushwick section of Brooklyn in 2001.
For three years, they scrimped to save the $8,000 down payment for a two-family house. They took out a $226,000 mortgage backed by the Federal Housing Administration.
But in 2004, an injury forced Ms. Johnson, 38, to take a leave from her counseling job at Fountain House, an advocacy group that works with the mentally ill. They struggled financially on her disability payments and her husband’s income as a construction worker. By the summer of 2004, they had fallen two months’ behind on their mortgage.
So Ms. Johnson called the Home Savers Consulting Corporation, a Brooklyn company that advertised help for people facing foreclosure. “I saw the advertisement in a local paper,” she recalled. “I was in a tight situation and was scared to death I was going to lose my house.”
Because the Johnsons’ home had risen in value, they could have sold it and paid off about $275,000 in debt. But they wanted to remain in the house.
Ms. Johnson met with Home Savers officials and agreed to what she thought was a refinancing of her loan at a lower interest rate with more affordable monthly payments. But the Johnsons unknowingly transferred their deed to a straw buyer working with Home Savers, court documents contend.
That stand-in buyer qualified for a type of mortgage that would let him take cash out as part of the financing. He borrowed $425,000 against the house and pocketed $134,000, which included the Johnsons’ equity built up over the years.
Now the Johnsons are fighting to stay in their house and to recover their equity.
Jessica Attie, co-director of the foreclosure prevention project at South Brooklyn Legal Services and the lawyer for the Johnsons, said her office was overwhelmed with homeowners who had handed over their deeds to people pretending to help “save” their homes.
Officials at Home Savers could not be reached; the company’s telephone has been disconnected.
Such foreclosure-related offers have attracted the attention of legislators, and at least seven states have created laws against them. Last February, New York instituted the Home Equity Theft Prevention Act, which provides legal recourse to victims. And last month, the Massachusetts attorney general, Martha Coakley, banned for-profit mortgage rescue operations from the state after numerous complaints.
Victims are becoming more plentiful as homeowners fall behind on payments and find that they cannot refinance, with mortgage rates rising. The Mortgage Bankers Association recently disclosed that nearly 19 percent of all loans to less-creditworthy consumers, or 1.1 million mortgages, were either delinquent by more than 30 days or in foreclosure. At the end of 2006, the figure among these loans was 17.9 percent.
When a property enters foreclosure, it appears on a list at the county clerk’s office. Individuals and companies in equity-stripping schemes monitor the lists closely, contacting troubled homeowners either by phone, by mail or by knocking on their doors.
These companies advertise heavily in target areas. “Are you losing sleep because of mounting debt and harassing bill collectors?” asked one flier from a “foreclosure specialist,” Equitable Real Estate Solutions.
Aleem Morris, 30, who lost his job as a forklift operator three years ago, answered that flier. Behind in his mortgage payments on a two-story home in the Vailsburg neighborhood of Newark where he lived with his ailing 82-year-old grandfather, Mr. Morris was desperate. He had borrowed money from family and friends, but the house went into foreclosure in February 2005. He owed $118,000.
Mr. Morris said he met with Kenneth McKinnon, an official at Equitable Real Estate, and told him that he had bad credit, no job and was losing his house.
According to Mr. Morris, Mr. McKinnon said those troubles could vanish. Equitable would arrange for someone else to buy the house — temporarily, as it was explained to him. In return, Mr. Morris would receive $20,000 in cash and someone else would make monthly payments while he and his grandfather lived there for a year.
Along the way, the monthly payments would be made in Mr. Morris’ name, repairing his credit, so that he could qualify for a new mortgage. After a year, the Morrises could buy the house back for $315,000.
The house was sold for $315,000. Records show that in May 2006, Mr. Morris received his cash, and that his debts, including a tax lien and outstanding mortgage payments were paid. But the remaining $127,199, which probably represented his equity in the house, went to a mysterious “construction note,” that Mr. Morris said he knew nothing about. Mr. McKinnon told Mr. Morris that to make the deal work, a lot of people had to be paid.
Last October, Mr. Morris was informed that his house was again in foreclosure. He started looking for a lawyer. Essex-Newark Legal Services is handling his case.
“I had no idea what I was doing,” Mr. Morris admitted, saying that his grandfather will suffer the most. With the promise of quick money, repaired credit and a place to live without paying rent for a year, he was easily tempted. “Who wouldn’t take a deal like that?”
Mr. McKinnon answered his phone, but declined to discuss the case. He did not return subsequent messages.
Foreclosure rescue deals vary in execution but as Mr. Morris’s case shows, they capitalize on two things: borrower desperation and mind-bogglingly complex mortgage loan documents. A study published last month by the Federal Trade Commission found that the documents were so confusing that 9 of 10 borrowers could not identify upfront fees on mortgage loans and half could not specify the amount they were borrowing. Sam Finkelstein, an advocate for affordable housing, has encountered several variations of foreclosure rescue schemes. One program offered by RYM Technology Holdings, which is based in Birmingham, Mich., lured at least 20 struggling local homeowners and as many as 40 other people in Chicago, said Mr. Finkelstein, who is a housing organizer at the National Training and Information Center, a nonprofit group based in Chicago that supports housing groups around the country.
According to participants in the RYM Tech program, company officials promised that if the troubled homeowners signed over their property deeds to RYM Tech and made monthly loan payments as usual, in five years they would get their homes back, free of any mortgage.
RYM Tech said it would use the equity in their homes to invest in apartment conversions in New York and China, earning fees for itself and enough to pay back the mortgages. Best of all, the homeowners could stay in their homes.
Shakeela Muhammad, 55, a former account manager at Bank of America in Chicago, heard about the program from a friend. She had owned her home on the South Side since 1988, but when she was laid off in 1998 after an illness, she struggled financially. By 2005, she was significantly behind on her mortgage.
Ms. Muhammad said she checked out RYM Tech with the Better Business Bureau; no complaints. She also called Felix Daniel, the head of the company, to ask if her home would be at risk. Not at all, she said that Mr. Daniel told her, adding: “I give you my word on my life.”
In August 2005, Ms. Muhammad signed up. Four months later, she received a notice that she was in danger of losing her home; RYM Tech had stopped making her mortgage payments. It had also refinanced her house and taken out $44,157 in cash that represented her equity. Her home went into foreclosure in May 2006.
“It’s amazing to me how these people sit at a computer and just rob you,” she said. “I want everyone who did it in jail with the bubbas and the brothers.”
Securities regulators in Utah have issued a cease-and-desist order against RYM Tech, and Arizona officials said a hearing was scheduled for this month in its civil suit against the company for offering securities inappropriately. Phone messages left at Mr. Daniel’s home were not returned.
Lea Weems, a lawyer at the Home Ownership Preservation Project at the Legal Assistance Foundation of Metropolitan Chicago, represents Ms. Muhammad and has helped keep her client in her home. A hearing in her case is scheduled for mid-July.
