Don't hand your house to a thief (© Image Source)Click to enlarge picture

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If owning a home is the great American dream, then swindling people out of their prized possession is one of the great, lucrative American scams. Mortgage fraud is on the rise, thanks to the tremendous value that's locked up in real estate today and to the increasing number of people who are struggling to pay their mortgages.

"It's kind of become the new get-rich-quick scheme out there," says attorney Rachel Dollar, publisher of Mortgage Fraud Blog.

More than 323,000 properties entered some state of foreclosure in the first quarter of 2006, a 72% increase over the same period a year ago, according to RealtyTrac. And things could get worse: Nationwide, more than one in three outstanding mortgages has an adjustable rate and interest rates have been rising. "Nobody really knows what's going to happen," says RealtyTrac's Rick Sharga, vice president of marketing.

But scammers know that people in trouble make easy victims. They're swooping in and offering to "help" beleaguered borrowers — and ending up with their house keys. Victims sometimes spend years fighting to get their homes back and some never succeed.

Meet Carol and Anthony
Carol and Anthony Calvagno of Deer Park, N.Y., on Long Island are in a hell like this right now. In 2003, the Calvagnos were in trouble. Anthony Calvagno had health troubles and had lost his job. In order to pay their bills, the couple took out a home equity loan on the Cape Cod-style house that had been in the family for three generations. (At the time, the couple had a $125,000 mortgage on a house worth about $290,000 — a high-equity target.) But even the home equity loan wasn't enough.

What's your home worth?

That's when Mitchell Sims swooped in, offering to help, says the couple's attorney, Arshad Majid.

Sims told the couple that he would arrange a bailout, and that they should stop making mortgage payments while he worked out the details. When foreclosure notices started showing up, he told the couple to ignore them, saying he'd take care of it.

Nearly eight weeks after Sims had entered their lives, and the day before their foreclosure was scheduled, Sims told the Calvagnos that the arrangement hadn't worked. Instead, he said they'd have to file for bankruptcy and enter a "special program" in which they'd sign over their house's title to one of Sims' employees and another of his business associates, who also happened to be Sims' brother. They'd be allowed to live in their home as tenants, Sims told them, and their rent payments would go toward buying their home back from him, says Majid. "They were put in the position where they didn't have any choice" but to sell their deed, Majid says.

But Sims never made any mortgage payments. He kept the Calvagnos' rent money and about $50,000 of the couple's money that remained after their creditors were paid.

The Calvagnos had fallen victim to a scam known as equity stripping — just one of the many flavors of mortgage fraud. Their house was sold. Sims and another person have been put in prison for their crimes. The couple has successfully fought eviction — so far — but not everyone is so lucky. Here's a quick look at three of the main ways scammers can steal the roof over your head.

Scam No. 1:  The bailout, aka 'equity stripping'
As the Calvagnos' case shows, this scam is particularly ingenious — and humiliating for the victim. In theory, a person or company could help a homeowner keep his house via a process in which the homeowner sells the house very cheaply to them while the homeowner gets his finances in order. The new owner pays the mortgage, and the old homeowner pays to live in the home in the meantime, buying back the home (with interest) in a fixed amount of time. If the financial setbacks are temporary, and the company is aboveboard, everybody can win: The homeowner keeps the house and the company earns a profit for its role as rescuer.

Suppose you've got a $200,000 home, with $100,000 of equity in it. A divorce and medical bills have you facing foreclosure. Suddenly, the phone rings with a bailout proposal.

So you sell your home, for $120,000 — not much more than what's owed on the mortgage. Why sell for so little? "Because it's never intended to be a true sale," Weaver explains; remember, you don't think you're selling the house permanently, but buying it back in a short period, right?

The new purchaser, meanwhile, takes out a $120,000 loan, wipes out any liens on your property and even gets you a little cash back; and you get a two-year lease with a purchase option at the end.

But soon you realize you're in trouble. Why? Because scammers aren't about to let you get your home back. Often, the lease terms desperate homeowners agree to turn out to be as onerous as their previous mortgage payments that helped get them into trouble. Con artists also manipulate victims when facing crucial deadlines.

"One of my clients was told that payments were going be to under $1,000 a month," Weaver recalls. But the criminals dragged out the process until the foreclosure was imminent and she was backed into a corner. "When she got to the closing … they were like, 'Oh, no, the payments are going to be $1,150.'

"Inevitably," she says, "you're going to default."

And default isn't pretty. The new purchaser evicts you as soon as possible, sells your $200,000 house, pays off the $120,000 loan and pockets about $80,000 — all for a few months' work, says Weaver. Some people don't even fight back because they don't know they have options — such as calling a lawyer, says attorney Dollar.

Do's and don'ts:
• Don't fall for promises like "We'll save your credit"; "We'll buy your house 'as is'"; or "We'll get you a new mortgage with low monthly payments."

• Don't sign away ownership of your property (sometimes called a "quit claim deed") to anyone without the advice of lawyer you trust. "When people get behind on their loan payments, they get a bit desperate, but the answer is not putting someone else on your title," says Oakland real-estate attorney James Hand.

• Beware of any home sale contract where you aren't formally released from liability for your mortgage. Also, make sure you know what rights you're giving up and that you agree to giving them up.