While legitimate home equity loans can provide temporary relief for some borrowers, predatory lenders have discovered new ways to convince unsuspecting homeowners into giving up both cash and property in exchange for a short term cash infusion. The practice, commonly known as "loan flipping," often targets recipients of Habitat for Humanity homes or other charity assistance grants.
How Loan Flipping Dissolves Home Equity
Refinancing a Habitat for Humanity property often results in a windfall. A newly-built home on an inexpensive piece of land appreciates quickly. Predatory lenders discovered that they could tempt homeowners with promises of a large cash payment in exchange for an unfavorable mortgage rate. Many state and county regulatory agencies responded by imposing severe penalties on higher mortgage rate refinance deals for Habitat homes and other charity properties. Removing the profit motive for this kind of mortgage scam only drove grifters to darker schemes.
Frequent Refinancing Masks Scam Artists' True Intent
Closed off from refinancing their targets into higher-rate mortgages, loan flippers found another strategy to siphon home equity without raising the ire of investigators. Instead of making money from high interest payments, loan flippers started offering borrowers lower fixed mortgage rates in exchange for exorbitant upfront fees. Because the fees could be pulled directly from home equity, unwitting borrowers never paid money out of pocket.
Over the course of three or four refinance deals, predatory lenders could extract tens of thousands of dollars of home value from each customer. In the most extreme cases, scam artists working for mortgage brokers would insert pages into refinance documentation for clients to sign. Those extra pages included blank bank forms, power of attorney declarations, and other legal instruments that allowed scammers to seize homes and bank accounts from unsuspecting borrowers.
Protecting Against Refinance Scammers
According to investigators, homeowners can insulate themselves from mortgage fraud by following a few simple tips:
- Avoid mortgage refinance solicitations, especially from door-to-door representatives. Your home may have been targeted by scammers, so deal only with reputable firms from whom you request information.
- Review all paperwork with a neutral third-party. Ask a trusted attorney or financial advisor to check all refinance contracts and forms before signing.
- Reject any mortgage refinance deals that require you to lie on applications. Unscrupulous brokers may be trying to stick you with a mortgage you cannot afford.
Although the vast majority of mortgage brokers operate ethically, a handful of rogue agents has caused many homeowners to become more suspicious about loan consolidation offers or "quick cash" schemes. By staying focused on long term financial health, borrowers can prevent themselves from becoming victims.
About the Author:
Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.
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