Foreclosure-rescue scam can leave borrowers stranded

It seems some misguided souls would rather turn the useful concept of equity sharing into equity skimming and bilk thousands of dollars from consumers.

Equity sharing first got its legs more than two decades ago when home loan rates were high and going higher. Conventional lenders generally had not taken the time to explore unconventional options, and adjustable-rate mortgages were unrefined and unacceptable.

Some potential home buyers, seeking all possible methods of getting in the door, found private investors willing to share the cost of the home in return for future appreciation. This initial idea, known as equity sharing, has slowed for one basic reason: Lenders are now readily making no- or low-down payment mortgages. Consumers now are able to borrow so much more that there’s less need for a partner. Why share the pie when a lender is willing to lend you most of the cost of the home?

The answer is that some people are forced to share when they cannot make the loan payments. In cases where they have borrowed too much and can’t meet the mortgage (perhaps because their loan’s introductory low interest rate has adjusted skyward), they look for a partner who can relieve the pressure in exchange for future equity.

With defaults and foreclosures on the rise, however, some unknowing homeowners have deeded the title to their property to the seemingly helpful investor-partner -- or they end up paying a higher-than-market rent to the investor who was supposed to cure the debt. When the homeowner can no longer pay the high rent, the investor ends up with the title or rent payments -- sometimes both.

“Most of the time, these people are vulnerable and believe anything that sounds good to them,” said David Huey, an assistant attorney general in Washington state who handles consumer-protection cases. “They don’t even know how much equity they have because all they remember is that they got a 100% loan and now can’t make the payments.” Huey said foreclosure-rescue scammers rarely put “any real money into the deal” other than a cursory payment to delay foreclosure and then string along the homeowner with paperwork and promises.

“When you step back and look at the economics of the deal, you can see it absolutely can’t work to the benefit of the consumer,” Huey said.

The need for equity sharing was shaped by credit. Under the guidelines that governed most lending institutions, people who have either cash but no credit or credit but no cash didn’t qualify for home mortgages at affordable rates. The lender’s position was understandable; it was using money from its depositors and had to exercise caution when granting a loan.

Equity sharing is now more often found in an investment property arrangement. When obtained through a reputable investor, equity sharing can be a profitable venture.

In investment (rental) property, a cash-poor buyer who knows of a good investment often seeks a partner to put up the down payment. The buyer then occupies the unit and makes the mortgage payments or is responsible for renting out the property so the mortgage gets paid. The two form a partnership to share the profits of the sale. The partners do not always get an equal stake in the property, but typically, the buyer, who has not contributed to the down payment, gets 50% of the increase in equity over a specified period of time.

Those partnerships are far different than the equity skimming schemes now seen in many foreclosure-rescue situations. While it’s absolutely possible that a partner could rescue you from foreclosure, be sure you understand what you are giving up to be saved.

The Mortgage Bankers Assn. of America has unveiled a consumer education campaign called Stop Mortgage Fraud in an attempt to help prevent scams and predatory lending.

The website www.stopmortgagefraud.com lists the 10 common warning signs of predatory lending. These include everything from being asked to leave signature lines blank to being encouraged to include false information on a loan application. Consumers can go to the website or call (800) 348-3931 to get information on what steps to take to file a complaint.

Tom Kelly’s new book “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit From Property South of the Border” was co-authored with Mitch Creekmore.