As long as there have been homeowners there have been home repair frauds.  Now a sophisticated scheme described as home equity theft is spreading rapidly, and the authorities estimate that at least 100,000 people in 20 states have had their homes stripped of value.

The targets are usually people with little access to conventional credit or poor credit histories, the elderly and minority members.  Most victims are women.

Sometimes loans are taken out, secured by their homes, without their knowledge; sometimes they know they are borrowing money but not what the costs will be or the consequences of defaulting.

In a typical case, Johnny Lee Tatum of Montgomery, Ala., a factory worker with a wife and three children, was approached last year by Charles Harper, a home improvement contractor, with a proposal for a $4,000 renovation to his home, according to Mr. Tatum’s lawyer, Thomas Methvin.  Mr. Methvin provided this account:

Mr. Tatum, who is 35 years old, thought he was signing a repair contract and a $4,000 loan application.  Unwittingly, he signed an agreement that used his home as security on a mortgage for $9,000 at 18 percent interest with $1,000 in fees that would be subtracted from the loan up front.  The lender was Union Mortgage of Dallas.

Mr. Harper kept $7,700 of the loan proceeds, gave $300 to Mr. Tatum and made no improvements on the Tatum home.  Union Mortgage received the $1,000 fee and the right to collect a total of $18,000 over time, secured by the Tatum home.  Mr. Tatum made payments on the loan for 18 months before he sought legal help.

$45 Million Court Award

In July an Alabama state jury awarded $45 million to five families, including the Tatums, that it found had been defrauded by Union Mortgage.  Union Mortgage, which is owned by Skopbank of Helsinki, Finland, is appealing the decision.  Mr. Harper, who was found by the jury to have been one of several agents for Union Mortgage, has not been charged with a crime, but he was a defendant in the civil suit.

Similar cases against a variety of institutions have been brought on behalf of people in Arizona, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Missouri, Michigan, Massachusetts, Maryland, New York, Ohio, Pennsylvania, South Carolina, Virginia and Washington.

“This is standard business practice in poor, minority neighborhoods here,” said Treena Kay, managing lawyer for Central Florida Legal Services in Sanford, Fla.

Millions of Americans have home equity loans or second mortgages; most financial institutions that do business with consumers either originate or buy second mortgages.  And their activities are almost always above board, with interest rates comparable to those of first mortgages or tied to the prime rate.  The number of second mortgages involving fraud is a very small fraction of the total of an estimated $300 billion in second mortgages outstanding, although precise figures are hard to come by.

The loans in the fraud cases carry interest rates of 18 to 40 percent and origination fees of as much as 20 to 40 percent of the value of the loan, said John B. Long, a Georgia lawyer who has represented 20,000 homeowners in suits.

In some cases, salespeople offer home repairs, carpeting, satellite dishes, debt consolidation or even cancer treatment.  Sometimes work is done but not to the customer’s satisfaction; sometimes it is not even started.

Signing Blank Forms

Typically, lawyers say, a salesman has the owner sign a paper he says is a repair contract.  In fact, it is a loan application secured by the home.  Repairs can start the next day, which in many states violates a required three-day waiting period.  One night, the salesman returns with a stack of papers on a clipboard – the second mortgage, disclosure forms, the real work contract and sometimes blank forms.  He has the homeowner sign each one, allowing only the line to be signed to be in view.

While some salespeople seem to be independent operators, many others seem to have ties to big lending companies.

Among the established financial institutions that have settled equity fraud lawsuits are Community Bank of Greater Peoria, Ill., which agreed to pay $4 million, and the Dartmouth Plan and 35 banks in Connecticut, which settled suits for $3.5 million.  The Landbank Equity Corporation and dozens of banks have made settlements totaling about $10 million in cases filed in South Carolina, Georgia, Virginia and Alabama.  In these cases, the institutions either thought it likely that the salespeople would be found to be their agents, as in the Tatum case, or they recognized they were holding mortgages obtained through deception.

Role of Leading Banks

A recent report by the Federal Reserve Bank of Boston concluded that most leading Boston banks extended business credit or bought paper from questionable lenders operating in neighborhoods that were largely un-served by the banks.  Since the spring, the State Legislature has temporarily banned foreclosures if equity fraud is suspected and the State Attorney General has identified 300 equity fraud cases and filed three suits.

And for every case seen by lawyers, 100 go unchallenged because owners are too distraught, embarrassed or do not realize they have legal recourse, said Troy Smith of the Legal Services Foundation of Los Angeles.

In Los Angeles, Robert M. Youngdahl, a Deputy District Attorney, is prosecuting one mortgage lender, Kevin S. Merritt, on felony charges of using deception and forgery to acquire 22 homes and two churches.  Civil lawsuits against Mr. Merritt accuse him of having acquired more than 7,000 properties through dubious means.  He has pleaded not guilty and is free on $400,000 bail.  Mr. Merritt’s lawyer, Donald B. Marks, said that he did not believe there had been any criminal intent and that his client would be vindicated.

Computers Put to Use

In California, the search for victims is computerized.  Teams in cars cruise south-central and east Los Angeles, according to lawyers for homeowners and prosecutors.  When they spot a likely home, rundown but valuable, they call the office on the car phone.  Using computers, the office checks county records and credit agencies, which can disclose if the spouse is dead, the children gone, the owner seriously ill.  If the opportunity seems right, the salespeople are told to knock on the door.

People who take the bait often find the collection process can be dogged.  “Lenders call 15 times a day; we’re talking old people, absolutely panicked,” Noreen R. Matts, an assistant United States attorney in Tucson, Ariz., said in a telephone interview.

Aside from the thousands of homeowners victimized, these equity schemes have hurt larger institutions.

$600 Million in Question

For example, about 500 individual and institutional investors bought about $600 million in fraudulent second-mortgage securities from the Freedlander Mortgage Company of Richmond, according to an assistant United States attorney, David T. Maguire, who recently won a fraud case against the company.  Such institutional investors include the Federal National Mortgage Association, which is known as Fannie Mae; pension funds; mutual funds; insurance companies, and financial institutions.  Fannie Mae’s share was $215 million.

The investors were told that the mortgages had a 5 percent default rate, but in fact the rate was 30 percent, Mr. Maguire said.  Last month, Eric Freedlander, the company’s president, was sentenced to nine years in prison.

Why would an agency like Fannie Mae, established by Congress to stimulate the housing market by buying mortgage from lenders, do business with Freedlander?

Lure of Higher Profits

Mr. Maguire said one $14.25 million pool of mortgage-backed loans that Fannie Mae bought from Freedlander in September 1984 carried 13.6 percent interest.  The agency stood to earn 50 percent more than it would have on conventional 30-year fixed-rate mortgages, he said.

Robert J. Engelstad, senior vice president for mortgage standards at Fannie Mae, said the agency had begun buying second mortgages to improve returns. As a result of the Freedlander case, he said, the agency reduced its portfolio of second mortgages and strengthened its procedures to determine qualifications of the borrowers and the lenders.

Among the investors who lost about $100 million on Freedlander investments was First Jersey Savings and Loan of Wyckoff, N.J., which later failed, Mr. Maguire said.  “Freedlander paper drove First Jersey under,” he said.

And Edward J. Pinto, a former Fannie Mae executive vice president, said: “Several institutions have been hurt with this paper since its quality varies and they don’t always apply their own strict underwriting procedures to the paper they buy.  There’s a segment of loan originators who don’t look at a borrower’s credit rating.  They assume they can take the house if there’s a problem.”

Home-equity borrowing has risen sharply in the United States since Federal tax law was changed in 1986, phasing out the deductions for the interest paid on most consumer loans – but not on most home equity homes.  “Since then, the industry has grown about tenfold,” said Susan M. Wachter, associate professor of finance at the Wharton School.

And with the growth in loans has come a growth in problems.  Kathleen E. Keest, a lawyer who monitors equity fraud for the National Consumer Law Center here, said, “In the last six years, equity theft has become our biggest problem.”

The tide of equity theft led the House Banking Committee to hold hearings in Boston last May.  In one Boston neighborhood, a lender had loans on 312 properties and 76 percent of them were foreclosed or had to be sold, said Bruce Marks, director of Union Neighborhood Assistance Corporation, an advocacy group.

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