Borrowers beware: Protect your greatest asset

June 06, 2003|by LYNN F. LITTLE

The equity in your home may be your single greatest asset. Many people have worked for years to actually own their homes. In areas with high rates of real estate appreciation, these homeowners may be rich in land but poor in cash. This situation makes the homeowner vulnerable to home equity loan fraud. Elderly and minority homeowners often seem to be the target of fraudulent practices.

Home equity loans allow the owner to borrow money against the home's equity. Equity is usually calculated by subtracting the amount owed on the home from the estimated value of the home. The home is the collateral that guarantees the loan. If the owner should be unable to repay the loan, the house could be lost in foreclosure.

Before taking out a home equity loan, answer these questions:

  • What is the total amount, including fees and interest, I will need to pay off this loan?

  • What is the annual percentage rate of interest? If it is at least 10 percent higher than rates on Treasury Securities of the same maturity, you must be given more information and special protections.

  • Is the interest rate fixed or adjustable?

  • How does the quoted rate compare with those of other lenders?

  • What fees, points and closing costs will be added to the loan?

  • Is there a balloon payment?

  • How much are my monthly payments and for how many months?

  • Can I really afford these loan payments?

  • Do I really need the repairs or improvements?

  • Will there be a prepayment penalty if I pay off the loan early or refinance with another lender?

Beware these practices

Consumer Action and the Federal Trade Commission have identified some of the practices that constitute home equity loan fraud. For many of them, monthly payments may be out of line with the borrower's income and risk of foreclosure is high.

  • Easy financing for home repairs: The repair work is often substandard, and the loans often have high interest rates and hidden costs.

  • Taking out home equity loans for the needs of caretakers, friends or family members is risky. They may promise to repay the loan, but they may not actually repay it.

  • Broker solicitation for mortgage refinancing. The broker may encourage the owner to borrow more money than needed and roll closing costs into the loan. The broker makes money from commissions, upfront fees and closing costs.

  • Scam artists may forge the homeowner's signature on a blank "grant deed." Much of the information needed to complete the grant deed can be found through public records. With the forgery, the scam artist can go to a bank and borrow against the equity of the home. To deter this fraud, notaries are now required to take a thumbprint of anyone having a deed notarized.

  • When a homeowner is falling behind on mortgage payments, a person who offers to save them from foreclosure for a fee may contact them. The person then vanishes with the money. Another scheme is to convince the troubled homeowner to sign over the deed in exchange for protection from foreclosure. The homeowner is then served with eviction papers.

  • Home equity skimming is another problem. When a homeowner agrees to "owner financing" in order to sell the home, he may fail to record the lien on the deed. If the lien is not recorded, the new owner may go to the bank as soon as the deed is recorded and take out a home equity loan and disappear. The original owner is then left with nothing but the small down payment.

  • The homeowner may be tricked into signing a blank lien document or deed transfer disguised as a service contract or registered mail receipt.

  • Offices set up in low-income or minority neighborhoods for short periods of time get homeowners' signatures on home equity loan documents and then disappear. The loans may be sold to other lenders who can then foreclose if the homeowner has not been able to keep up the payments because they couldn't find the office or address of the lender.

Protection guidelines

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