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Everyone's trying to figure out what makes equity stripping illegal. Misty Collins just wants her house back.
Stripped Clean
Two years ago, a woman named Denise Brantley contacted ACORN. Before then, the group had worked with victims of predatory lending, a more prominent practice than equity stripping. Predatory lenders use deceptive or aggressive sales tactics to set up unfair loan terms and complicated transactions that take advantage of borrowers. In the summer of 2002, there was only the slightest inkling that a new scam was being hatched.
"We had been hearing from people who were behind on their mortgage. They'd call and say someone had offered to buy their house," says Jordan Ash of ACORN. "We said, 'That doesn't seem to be a good idea.'"
But it wasn't until Brantley showed up with papers and numbers that the group realized they had a new problem on their hands. "We thought predatory lending was bad," Ash said, saying the foreclosure scammers show no remorse. "Equity strippers make [predatory lenders] look like angels."
Brantley's documents portrayed evidence of downright fraud, as well as real estate law violations. Brantley, a grandmother on disability after suffering a heart attack and a stroke, sold her home to Grant Holding, a St. Paul real estate investing company, with the understanding that she would buy it back later. Instead, unable to keep up with monthly payments that leapt from $607 to over $1,000, Brantley received an eviction notice in May of 2002. And she'd lost the $50,000 or so her house had in equity. Eventually she was kicked out of her St. Paul home.
Although Assistant Attorney General Cox says equity-stripping victims are a diverse bunch--from inner-city residents to suburbanites, poor to wealthy--many tend to be unfamiliar with real estate transactions, making them especially vulnerable. They may even be unaware of the significance of their own equity; the portion of a house that a homeowner owns (the value of a home minus the mortgage amount) is often an owner's main financial asset.
Powell agreed to take on Brantley's case when ACORN contacted him, even though he had never heard of equity stripping. He soon realized how complicated his task was--but it proved to be a benchmark case. Brantley's lawsuit was filed last October and a temporary restraining order against Grant Holding was issued, allowing Brantley to remain in her home. The parties entered mediation, and Brantley won the right to buy her house back for the $92,000 Grant bought it for.
(More recently, Ramsey County District Court Judge John Finley issued another restraining order against Grant Holding, prohibiting the company from filing papers dealing with deed transfers, evictions, and foreclosures in that county.)
Most victims are not as lucky as Brantley. "Even if the judge rules in their favor, they have to come up with the mortgage to buy it back," Ash says. "That's a huge barrier. A lot of people aren't able to do that."
There are other barriers. Housing court, usually the first step in the legal process after someone has been evicted, has little interest in determining anything other than whether the defendant is making rent payments. And lawyers are seldom involved in housing-court cases--making it all the more difficult for victims to find legal representation if they decide to prosecute.
The new law in Minnesota requires that the buyer does not charge more than 60 percent of income for monthly payments, that the buyer be able to prove that a homeowner will be able to buy the house back, and that, if a former homeowner still falls behind and fails to buy the home back, the former owner will receive 82 percent of the difference between the house's market value and the mortgage paid by the buyer.
Cox believes the law will both hinder the practice and make the cases easier to prosecute. The good intentions behind the law are clear. What's unclear, however, is what the unintended consequences will be.
"It remains to be seen how much the new law will help consumers," says St. Paul lawyer John Tancabel, who is representing Collins and several others in equity-stripping cases. Tancabel points out, for instance, that there's no fixing bad credit after homeowners have been duped. "The law contains some provisions which will definitely help some consumers in foreclosure, but contains other provisions which will provide little protection."
And equity stripping is nebulous enough that some investors maintain they're on solid legal--and even ethical--ground. Tom Kolar of Capital Lending, which bought Collins's house for $165,000 and charged her $1,475 per month to live in it, praises the law, and says he hopes it will erase the stigma he says he faces because of a few unscrupulous people. (Collins had paid $1,052 monthly on her mortgage.) Kolar maintains that investors give people an opportunity they wouldn't have otherwise.
"The fact of the matter is, [Collins] would've been out on the street," Kolar says. "Without people like us, they will lose their homes."
But even with Kolar's proclaimed magnanimity, there's a huge price to pay. What investors don't say, contends Becky Gomer, ACORN's head organizer, is that homeowners are often financially better off with their equity than with the opportunity to lease their home. Most equity-stripping victims lose tens of thousands of dollars in equity.
Meanwhile, Collins's case remains unsettled, and only chipping paint and crumbling steps indicate the havoc inside her house. A friend rescued the family from the streets the day of the eviction, paying for a hotel for the weekend. But afterward, Collins says the family returned to find the home cleared of most belongings, although the family maintains residency thanks to a judge's order. The house is now furnished with old mattresses and broken furniture recovered from neighbors' trashcans.
As she waits for her trial in November, Collins considers herself lucky to have a lawyer and a place to live, at least temporarily. But because of the legal loopholes and uncharted territory that equity stripping broaches, the house could still slip through her hands.
"We have nothing besides our house," Collins says. "I'm hoping and praying to God we don't lose that."
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