Equity stripping is the act of taking money out of the value of a home over what is owed to all the lenders combined. The simplest example is when a homeowner gets a Home Equity Line of Credit ("HELOC") in addition to his mortgage. This amount typically takes the remaining equity to 10% or 20% of the fair market value ("FMV") of the property. If the FMV of the property declines by 10%, there may not be any remaining equity in the home, and with another 5% market decline, the homeowner will be "upside down" in his mortgage.
While this example is absolutely legal, it becomes an issue when the homeowner gets an equity line and never makes another mortgage payment and goes straight into foreclosure. This is a fairly common practice of what I call "selling to the bank" since the bank will have to buy the home at the auction for the amount owed on the mortgage. It may be difficult to prove the homeowner's motive was to scam the lender, but some lenders have bought legal actions against homeowners for this practice, usually on grounds that the homeowner falsified the loan documents.
Another form of equity stripping, which is illegal, is when a homeowner in foreclosure rents his mortgaged property and does not make the mortgage payments. Sometimes the renter will get the foreclosure notice, stop making the rent payments, and be evicted and lose his rent paid and his deposits. Even worse is when investors do a lease option with a renter / buyer, take an "option consideration" of 5% of the strike price of the option and collect lease payments until the lender forecloses and evicts the tenant.
In the example of the lease option, if the lessee (renter) agreements to a purchase price of $ 200,000 and puts down a $ 10,000 (5%) "option consideration", he will lose his $ 10,000 plus all his lease payments when the lender evicts him from the home after the foreclosure. It is common for the investor to tell the lessee that he got into financial trouble and is going into bankruptcy and it was not intentional that he is losing the perspective buyer's home to foreclosure. The investor will probably offer the buyer a deed to the property, but the deed is worthless as the lender's foreclosure action will nullify the deed and the buyer name may become associated with the foreclosure action in the public records. The buyer may have specific criminal action against the investor, depending on the state in which the property is located.
The most common form of equity stripping is when the homeowner is moving out of his home before the auction or before the eviction, and he "strips" the home of everything that can be removed. This includes all the appliances, the kitchen and bathroom cabinets and in some cases, he may even take out windows and doors. This may be an act of revenge or desperation, but it is common to most foreclosures to varying degrees. The lender is not entitled to personal items and it becomes vague wherever they are entitled to anything in the house. I looked at a property a week ago where the contracts got so angry that they jacked up the property and lowered it to crack the support joists. The result was the home was "broken" and the floor was cracked and wavy and the door frames were all out of alignment so the doors could not close.
In summary, equity stripping takes many forms from very simple to vindictive. If you decide to equity strip your home before foreclosure you should get legal advice about the consequences.