Low-Income Homeowners Are Prey to Scam Artists Who Drain Increased Equity Through Fraudulent Loans : Misdeeds of Trust

Lincoln Allen has been a diesel mechanic for most of his 61 years. He can tell you just about everything there is to know about fixing big rigs.

“But ask me about real estate and I’m like a newborn babe,” he admitted. “I trust other people to show me what to do. Right now I’m in bad trouble because I trust people. I could be losing my house.”

Allen’s plight is not uncommon. He is among hundreds of victims of real estate scams proliferating in Los Angeles’ poorer neighborhoods.

“Equity swindles and fraudulent foreclosures are a growing concern,” said Troy Smith, directing attorney for the Homeowners Outreach Center, which investigates equity fraud (against homeowners). “There are people out there making incredible profits on the backs of poor people.

“Chances are, at this very moment, some unscrupulous, smooth-talking real estate operator, lender or home improvement rep is out knocking on doors talking some trusting soul into signing away the rights to his or her property.”

In the first quarter of 1991, Smith said, the center received more than 400 equity fraud complaints--triple the number recorded for the same period in the early 1980s.

Allen came to the center for help when threatened with foreclosure.

He couldn’t believe he was on the verge of being turned out on the street. Allen was left to raise two daughters after his wife died during childbirth 18 years ago. This responsibility, added to his own progressive ill health and, more recently, the loss of an eye to glaucoma, forced Allen to take two separate loans on the house he had purchased in southwest Los Angeles in 1969.

“By 1989 my life was slipping through the cracks,” Allen said, “until one day a pleasant young man stopped by and said he’d heard about my problem. Said he thought he could help me.

“He sent me to a loan broker who assured me I had plenty of equity in my home, enough to pay off the existing trust deeds on the house and to borrow an additional amount in cash for advance payments on the new loan, ‘til I could get back on my feet.”

Allen signed a number of documents, which he had trouble reading because of his poor vision, although none, he believes, were notarized in his presence. Later, when copies of the documents were returned to him, there was a trust deed for $12,500 made out to an associate of the broker with a signature Allen said was not his own. He also did not receive any of the cash promised him.

“They took it all away from me with the stroke of a poisoned pen. All that hard-earned money that went into paying for the house these past 22 years,” he said.

The public’s perception of the poor is that they are mostly renters. Not so in established black neighborhoods, where many of its residents are longtime homeowners, according to Smith.

“But the majority are unaware of the increased value of their homes or how to properly access their equity,” he said. “This makes them a primary target of rip-off artists.”

Homeowners Outreach Center, a service agency of Legal Aid Foundation of Los Angeles, began operating in the South-Central Los Angeles area in the late 1960s as an outgrowth of numerous complaints received by the Los Angeles City Council and the County Department of Consumer Affairs.

The center’s objective is to try to resolve a case without litigation, said Patricia Goldsmith, one of four staff attorneys, formerly with Oregon’s Legal Services.

“It saves the victim money, time and considerable emotional distress. In 90% of our cases, if the victim contacts our office before they lose their home, we’re generally successful in getting the property reconveyed.

“Half of the problem with home equity fraud is caused by lenders who convince low-income people to take out loans they can never realistically repay,” Goldsmith said.

“The other half stems mainly from dishonest loan brokers. A common practice is for the unscrupulous loan broker to convince the borrower to sign, among other documents, a deed of trust giving the broker temporary title to the property, on the pretext that this is normal procedure for obtaining a loan. During the time that the title is in the broker’s name, the broker may then get a loan for himself without the knowledge of the borrower,” she said.

At the root of equity fraud, Goldsmith continued, is an extreme lack of banking services for low- and moderate-income homeowners, even those with good credit, which means they are easy targets for lenders who actually work their neighborhoods and knock on doors.

“Lenders may not always be a part of a swindle but those who do take advantage of homeowners know and use every means to legally bind themselves to a piece of property,” she said.

Goldsmith described the two most common complaints from clients:

“One is typically from the homeowner who was induced to sign a document that transferred ownership of property, without really understanding the terms of the agreement. The other involves a contractor who does work on a person’s home that almost always involves illegally placing a lien against the property.”

Low-income neighborhoods have become the targets of intense telemarketing and house-to-house solicitation for services ranging from “cable busters” (satellite dishes to improve TV reception) to health care services, she added. “A typical come-on offers homeowners a ‘special’ on roofing, carpeting or drapes where the homeowner gets 25% off or free lottery tickets if he signs a contract right away,” Goldsmith said. “The contractor also indicates he can get financing for the borrower at low monthly rates.”

What the potential victim doesn’t know is that the unscrupulous contractor is working hand-in-hand with the lender, she added. The contractor’s deal with the lender for getting him the client is to receive advance payment for the work being done.

Repeatedly, in such cases, the work is done shoddily, the homeowner refuses to pay for work that is poorly done and as a result goes into default for non-payment.

Home improvements such as security systems, air conditioners, drapes, carpets and a range of home repairs are frequently secured by trust deeds, although under state law a lien cannot be placed against a property unless the goods purchased are permanently affixed to that home.

“Scam operators rightly assume that these homeowners don’t know this difference and will use whatever product they are pushing to put a lien on their homes,” Goldsmith said.

“In the majority of cases, we are dealing with older clients who have retired on fixed incomes to a life of poverty or near-poverty and the equity in their homes is all they have left.

“Some can’t read, others can read but don’t comprehend the meaning of such legal terms as balloon clause, interest-only payments or variable percentage rates. Most of all, they are vulnerable because they are so trusting.”

When Essie Harris, 72, was having problems collecting the rent from her boarders and was getting behind on payments on her house in South-Central Los Angeles, an offer made by Robert Boyd seemed like a reasonable solution to her problem.

Boyd, who was introduced by a relative, offered to take over the house payments and title to Harris’ property in return for which Harris would be entitled to live in her home until she died.

Boyd presented Harris with a blank deed of trust that she signed on assurance that Boyd would fill out the terms of their agreement. According to Goldsmith, the document that Boyd recorded stated that Harris had granted her property in its entirety, as a gift, to a Richard Devon Ford, whom Harris had never met. She knew something was wrong when she began receiving notices of default from her bank.

Meanwhile, Goldsmith added, Harris learned that Boyd had been killed and that Ford, who now had title to the property, never made any mortgage payments. On the advice of a friend, Harris contacted Homeowners Outreach Center.

A court action filed by Goldsmith against Ford on behalf of Harris is pending.

When contacted by The Times, Ford said he had done a favor for a friend, didn’t know what he was getting himself into and had already signed a quitclaim deed. (which reconveys the property). This was confirmed by Goldsmith.

Harris hopes the judge will order the property returned to her or that she will be compensated if she loses her house.

Equity fraud victim Nicola Felix, 70, describes herself as “a nervous wreck” and is under a physician’s care to ease the mounting fear that she may lose her home.

She has lived in South-Central Los Angeles for the past 38 years. Her three-bedroom house is across the street from the church where her children were baptized and next door to her sister.

“This is my neighborhood,” she said. “Now I just don’t know what’s going to happen.”

Felix worked as a power machine operator until she had a stroke and a heart attack in the 1970s. She had kept up her house payments, taken care of repairs and had even saved enough to have aluminum siding put on her house, she said proudly. “I now live on a small fixed income.”

In 1985, Felix needed security bars and took a loan against her property to pay for the installation. She later added the cost of termite work to the previous loan.

In 1989, a remodeling firm offered Felix a special deal on new carpeting and she agreed to have it done after being told that a new second deed of trust could be drawn up to combine the cost for the carpeting and her existing debt. What Felix didn’t know until after she had signed the new agreement, was that the document required a balloon payment.

“I didn’t know what a balloon was until my son, who lives in San Diego, explained it to me. I got so worried because I knew I would never be able to pay off a large sum of money all at once in five years,” Felix said.

Feeling trapped, Felix agreed to the offer of another remodeler who had done work in the neighborhood who said he could fix it so Felix could have a straight loan, with lower monthly payments and no balloon payment due at maturity. All she had to do was to sign up for an additional home improvement, such as drapes.

Felix signed the papers only to discover that she now had a third trust deed on her house and that the second trust deed remained intact with its balloon clause.

Her brother-in-law urged her to get help from Legal Aid Foundation. Her case was assigned to attorney Denise Johnson at the agency’s South Central branch.

“Seems it was calculated by the people Mrs. Felix was dealing with that her default would be inevitable,” Johnson said. “At the moment we are trying to sort out the details of the case. If negotiation fails, we are prepared to take appropriate legal action.”

The Los Angeles County Department of Consumer Affairs has also had its share of complaints through its Homeowners Fraud Prevention Program, started in 1978.

“Many have to do with home remodeling scams. These operators are not really in the carpet and drapery or air-conditioning business,” said Timothy J. Bissell, chief investigator for the Consumer Affairs Deparment. “They are in the business of getting liens on properties. Legitimate remodeling services are done by licensed contractors.

“The victims are usually people who lack the ability to purchase with credit cards and cannot qualify for traditional loans. They are sitting ducks to people offering dreams come true on easy payments.”

Leon Wilburne, a retired investigator and a former member of the Homeowners Fraud Prevention unit, summarized the deceptive actions of scam operators.

“They prey on the desperate,” he said.

“They play musical chairs with documents, switch names on titles, forge homeowners’ signatures, use a bogus notary to record a contract, go to lenders with fake IDs, milk the property of all its equity, deed the property back to the former owner and then usually disappear, leaving a trail of financial ruin and human wreckage.”

One of the problems, Wilburne said, is that the law says anyone can go to the county recorder’s office to register a document without having to submit any proof of authenticity of such a document.

“And while the State of California Notary Public Division maintains a registry of notaries it does not control the issuance of notary seals. Anyone can have one printed at the nearest print shop without submitting proof of being a notary public.”

Home equity fraud is a felony, said Detective Richard Le Vos, one of several detectives of the Bunco/Forgery division of the Los Angeles Police Department assigned to investigate homeowners complaints of forgery of a deed of trust or theft by false pretenses and misrepresentation.

The department’s most frequent complaints involve conversion of equity, forged reconveyances, “pumped” (inflated) appraisals, fraudulent applications and foreclosure fraud.

“If someone induces you to sign a paper by telling you things that are misleading or untrue just to get you to sign a contract, it constitutes a felony. And a felony where more than $400 is involved is grand theft. If proven guilty, the offender would be imprisoned from 16 to 36 months, depending on the monetary loss involved, Le Vos said.

“Some innovative crooks have even conducted home equity scams from their prison cells, working with a partner on the outside, others open their own escrow companies with names similar to that of reputable firms.

“Never sign a document involving anything as important as your home, without having legal advice you can depend on,” warned Le Vos.

Bissell of the Consumer Affairs Department added this optimistic note:

“While only one out of 100 victims ever complains, increasing communication between agencies is helping to uncover more and more cases. As a result, we are now getting far better results pinpointing the culprits.”

Where You Can Turn If You’re a Victim of Fraud

If you feel you are a victim of home equity fraud, here are sources you can reach for assistance: Legal Aid Foundation

of Los Angeles

1550 W. 8th St.

Los Angeles, Calif., 90017

(213) 487-3320

Homeowner’s Outreach Center

3406 W. Washington Blvd., 10

Los Angeles, Calif. 90018

(213) 732-0153

East Los Angeles Legal Aid

5228 E. Whittier Blvd.

Los Angeles, Calif. 90022

(213) 266-6500

South Central Legal Aid

8601 S. Broadway

Los Angeles, Calif. 90003

(213) 971-4102

San Fernando Valley Legal Services

13327 Van Nuys Blvd.

Pacoima, Calif. 91331

(818) 896-5211

Community Legal Services

401 E. Compton Blvd.

Compton, Calif. 90221

(213) 638-6194

Los Angeles Center for Law and Justice

2606 E. First St.

Los Angeles, Calif. 90033

(213) 266-2690

Los Angeles County (The above do not accept walk-in appointments and have limitations on clients’ income and geographic location). Los Angeles County

Department of Consumer

Affairs

500 W. Temple St., Room B-96

Los Angeles, Calif. 90012

(213) 974-1452

(all areas of L.A. County) Los Angeles Police

Department

Bunco/Forgery Division

150 N. Los Angeles St.

Los Angeles, Calif. 90012

(213) 485-3795

Los Angeles County

Bar Referral Service

(213) 622-6700

Beverly Hills Bar Referral Service

(213) 553-4022

Burbank Bar Referral Service

(818) 843-0931

(Lawyer referral services refer clients to accredited attorneys with expertise in the pertinent area. Initial consultation is at a reduced rate. Fees for further representation are arranged between attorney and client.)

Typical Scams and How You Can Prevent Them

The following are typical scams used to cheat low-income or financially distressed homeowners out of their houses. These real-life situations are drawn from the files of Homeowners Outreach Center. In bold-face type is the advice offered by experts at the center.

1--Mary responds to a flyer mailed to her home telling how she can tap the equity in her home, and Bob, a company representative, contacts her to arrange for the loan to purchase a car and consolidate some bills.

He tells her she has enough equity to borrow an extra $25,000, which he offers to invest for her in a profitable business. A couple of months go by and Bob reports that the business he invested in has failed and he cannot return her investment. Bob actually pockets the money and Mary ends up in foreclosure.

Don’t take out a loan on your house to get a new car or to apply to a risky venture.

Don’t be tempted by offers from lenders who telephone or mail flyers to solicit business. Seniors are particularly vulnerable; beware of people who use religion to gain your confidence.

Ask yourself: Do I really need this much money right now? Many lenders encourage you to borrow more than you need since they get more points and commissions.

Ask the lender: Is the interest rate fixed or variable? How many points are charged (some charge 10 to 15 points)? Is this an amortized loan or an interest-only loan where you have to pay back the entire principal at once at the end of a few years? Many people are paying over 25% interest and don’t realize it.

2--Rapid Remodelers tell Jim and Joan they can renovate their kitchen for $20,000 and ask if they already have financing. They don’t. Coincidentally, a sales rep from Friendly Finance happens by that afternoon offering financing for home repairs.

Jim and Joan take out a loan on their home and ask Friendly to pay Rapid in-progress payments. The couple has no idea that Rapid and Friendly are owned by the same people. Rapid gets all the money up front, doesn’t deliver the work as promised and Jim and Joan have to spend additional funds to get the work completed.

Insist on handling the loan proceeds yourself and pay the remodeler directly, in-progress payments.

3--Jim, laid off for a couple of months, is now back at work. He needs $4,000 to catch up with payments. His credit record is poor.

Pete shows up, tells Jim he can get him a loan and gives Jim several documents to sign. Among the forms he is asked to sign is a deed of trust giving Pete title to Jim’s property, a temporary measure Pete says is needed to obtain the loan.

With that in hand, Pete takes out a loan for himself on Jim’s property, returns the title to Jim and skips town.

When you add someone else’s name to your property that person has the right to sell their share of the property to someone else. Never sign any kind of deed transferring your property unless you mean to give it away.

4--Susan is in foreclosure. Her house will be sold in 120 days if she doesn’t pay the $5,000 she owes in mortgage payments. She is flooded with offers from people who only want to help her. One lender comes to her home and offers to lend her $8,000 at 10% over 10 years. She is relieved, signs the papers, time passes and the loan hasn’t come through.

Finally, on the 89th day, the lender calls Susan to say that he ran into a snag and can’t get the $8,000 loan through in time. The best he can do is to refinance the entire $50,000 owed on the property at 14%. But it may cost her 10 points plus a few other fees and it’s a five-year interest-only loan. To keep her property out of foreclosure, Susan signs the loan agreement.

Don’t let a lender hang you up if you have a time crunch. And if you’re not sure about every single document you’re signing, don’t do it until you seek legal advice.

5--Lousy Louie sends Harry and Jane a letter telling them how they can save thousands on their mortgage interest by making payments once every two weeks instead of once a month. That way they’d end up making the equivalent of 13 monthly payments each year, shaving about 10 years off the life of a typical 30-year mortgage. But what Louie doesn’t tell Harry and Jane is that they can accomplish that same goal by making the extra payments directly to the lender each year and avoid a huge service charge.

Don’t be duped. Avoid paying a middleman for a financial agreement you can set up directly with your own bank or lender.

6--Fortunate Funding really wants to arrange a loan for Walter but his income is low and his credit isn’t great. Funding hints that maybe Walter can fudge a little on the application but he must come up with some paperwork showing higher earnings. This should get the loan through.

Walter needs the money and goes along with Funding’s suggestion. After all, it was the lender who asked him to do this. If Funding gets Walter a loan through a bank based on the phony paperwork, Walter will be guilty of fraud and in bad trouble.

Don’t let a loan broker get you to make false statements. You could be defrauding the loan funder, and just think what the Internal Revenue Service would say.