Stealing home.

• Author: Hudson, Mike
• Position: Home equity loans

How the government and big banks help second-mortgage companies prey on the poor

Just before the credits roll in the movie Tin Men, a couple of 1960s aluminum-siding salesmen commiserate about losing their licenses to hawk home improvements. A city commission has decided to punish the "tin men" who steal the equity in people's homes through shoddy work and overpriced second mortgages.

"You wanna know what our big crime is?" asks tin man Richard Dreyfuss bitterly. "We're nickel-and-dime guys--just small-time hustlers who got caught because we're hustling nickels and dimes."

In real life, three decades later, tin men are still plying their trade in cities across the United States, and home equity rip-offs are no longer nickel-and-dime stuff. Instead, they're well organized, demographically marketed, and nationally franchised. Second-mortgage companies have raked in billions of dollars by fanning out salesmen to slick-talk inner-city homeowners into signing high-interest loans to repair aging rowhouses, pay off medical bills, or stave off foreclosure.

Hundreds of thousands of homeowners have been victimized in the past decade. Tens of thousands have lost their homes; still more have seen their equity sucked out by exorbitant fees and usurious interest rates charged by predatory mortgage companies. Homeowners make ripe targets because they've spent years building up equity in their homes--and because runaway inflation in real estate values has left them sitting on equity gold mines in spite of their modest incomes. Many are targets because they are old or illiterate. Others are vulnerable simply because they are poor and black; they have nowhere to go for credit because mainstream lenders--the banks and savings and loans that have made the American dream of homeownership possible--are reluctant to lend money to residents of working-class black neighborhoods. With mainstream credit cut off, homeowners desperate for cash turn to second-mortgage companies that charge 20, 30, sometimes even 40 percent annual interest.

How does the scam work? Consider 84-year-old Roland Henry. In 1989, real estate entrepreneurs Kevin Merritt and his assistants spotted Henry through a foreclosure listing service. Merritt, then 29, had been working in the Los Angeles real estate market since he was a teenager and claimed to have accumulated a net worth of $10 million. Henry, who got no further than sixth grade, had bought his home three decades earlier with earnings made by selling homemade tamales on street corners in Watts. By the time Merritt got to him, Henry, nearly blind and confined to a wheelchair because of arthritis, was facing foreclosure on two home-equity loans he had taken out when he purchased what he thought was $180 in carpeting.

Merritt offered to help Henry save his home by giving him yet another loan to pay off his debts to the first two lenders. Henry claimed that Merritt fooled him into signing away his two-bedroom house. Merritt claimed Henry knew exactly what he was signing. A civil jury believed Henry. His family was awarded nearly $1.7 million from Merritt's firm this spring. Henry, however, didn't get to hear the verdict. He died last year.

Last May, Merritt was charged with 32 felonies alleging the theft of equity and homes from poor people. He has also been sued at least 175 times. But Merritt, who denies the charges, is still in business--and an increasingly lucrative business it is.

According to Duff and Phelps Credit Rating Co., home equity lending jumped from $1 billion in 1982 to $100 billion in 1988. And while the second-mortgage industry can be a pretty dirty business, to many mainstream banks and S&Ls, the money to be made from it has proved a great temptation--so great that they've helped maintain the home-equity feeding frenzy by bankrolling the tin men: advancing them money for operating expenses and buying up the loans after the ink dries. For example, a subsidiary of the Fleet Financial Group, New England's largest bank, extended a $7.5 million line of credit to one of the region's most notorious lenders, Resource Financial Group. A study last year found that more than three quarters of the Boston families who borrowed money from Resource were facing foreclosure or had already lost their homes.

Fleet is not alone. While most home-equity loans involve middle- to upper-income borrowers, the low-end market and its tantalizingly high interest rates have attracted the attention of financial institutions from Citibank to Security Pacific to the former Bank of New England. (According to...