Although "foreclosure re-conveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or unmeetable terms.
Subprime loans targeted at vulnerable and unsophisticated homeowners often lead to foreclosure, and those victims more often fall to equity stripping scams.
[2] Additionally, some do consider equity stripping, in essence, a form of predatory lending since the scam works essentially like a high-cost and risky refinancing.
Equity stripping, however, is conducted almost always by local agents and investors, while traditional predatory lending is carried out by large banks or national companies.
This requires the involvement of lenders and an approval process, as the borrower takes a type of mortgage loan called a cash-out refinance to purchase the property.
The rescue artist or arranged investor pays off the amount owed in foreclosure to acquire the deed, and inherits or is paid any portion of the homeowner's remaining equity.
The rescue artist will express intention to reconvey the property back to the homeowner in the form of a lease or a contract for deed.
Simple mortgage assumption allows the owner of the home in foreclosure to transfer the deed to the property to the rescue artist without the involvement of any lender.
After the transfer of the deed, the original owner and the rescue artist are held equally liable for the remaining debt and pursued by the lender for payment.
The rescue artist may not leave with the equity proceeds immediately; rather, they may charge rent payments to the original owner (now tenant).
In some instances, the rescue artist takes as many rental payments as possible while defaulting on the mortgage, leaving the original owner to be evicted from the property in the resulting foreclosure, losing both their home and money.