Equity stripping
Equity stripping means extracting a homeowner's accumulated equity through a transaction structured so the owner cannot recover the property.
Minnesota named its 2004 legislation after the problem, and the statute is unusually direct about what it was addressing.
The target population#
Homeowners in foreclosure, and the targeting is not sophisticated.
A notice of pendency is recorded. A notice of foreclosure sale is published. Both are public, both name the property, and both identify a household under time pressure.
Combine that with a house carrying decades of accumulated equity — most often an older owner who has paid down a mortgage over many years — and the list of prospects assembles itself from the record.
The structure#
The homeowner deeds the property to someone who promises to save it.
That party pays off or redeems the mortgage. The homeowner stays on as a tenant, with an option to repurchase later.
Every term is disclosed. The rent is higher than the mortgage payment they could not make. The repurchase price is above what they could finance. The option period is short.
The arrangement was never survivable, and at the end the homeowner has lost the house, the equity, and paid rent in the interval.
What chapter 325N does about it#
Contract requirements in prescribed form.
A five-business-day cancellation right that does not begin until the contract complies and all parties have executed — and a timely cancellation renders any deed executed beforehand void.
An ability-to-pay standard on the repurchase terms, so the arrangement must be one the homeowner could realistically perform.
Minimum consideration to the homeowner where the reconveyance fails, which prevents a failed arrangement operating as a transfer of the whole equity.
An independent closing, not conducted by the purchaser or an affiliate.
Prohibited representations. A purchaser may not claim to be acting on the homeowner's behalf where the result is the homeowner's failure to redeem.
Waiver is void, with one narrow exception requiring a handwritten statement signed by all title holders where a sale falls within five days.
Recognising it#
The warning signs are consistent.
Any request to sign a deed as part of saving the house. Being told to stop talking to your servicer. Pressure to sign near a sale date. A repurchase arrangement whose terms you cannot actually meet. An upfront fee.
The reliable rule#
Legitimate foreclosure help costs nothing.
HUD-approved housing counselling is free. Your servicer's loss mitigation process is free. Legal aid is free for those who qualify.
If someone is charging you in advance, or asking for a deed, they are offering something other than help — and in Minnesota, chapter 325N exists because enough of them were.