Home Buyback Also Reveals Hidden Habitat for Humanity Lending Practices

Print Share on LinkedIn More

March 7, 2011; Source: Herald-Tribune | Habitat for Humanity usually builds homes for people who don't have one and sells them to the new owners at cost. Now the New Orleans Habitat chapter finds itself in the rare position of having just bought back a home that was built with tainted Chinese drywall. In addition, the court case that led Habitat to buy back one of the many homes built for residents displaced by Hurricane Katrina in 2005 also has shed the spotlight on previously unknown lending practices that, according to Herald Times columnist Aaron Kessler, leave buyers "underwater on their homes from the moment they walk in the door."

The home in question is located in a part of New Orleans known as Musicians' Village, and was built with a form of gypsum that (as NPQ previously reported) is said to cause the structure to deteriorate and make it unlivable because of severe corrosion that destroys electrical wires and appliances. The home’s owner, Brian Morgan, a classical organist and former Catholic monk, sued last summer to get Habitat to buy back his home rather than accept an offer to fix it.

Morgan said he didn’t trust Habitat to do the repair because of the group’s earlier assurances that homes built with drywall from Taishan Gypsum Co. were safe. Although the case is a black eye enough for the New Orleans Habitat chapter, its reputation is not being helped with disclosures about how it structures loans to buyers.

According to Kessler, Habitat uses “hidden second mortgages to keep owners from selling the homes quickly for a profit. The hidden second mortgage is supposed to decrease every year — say, by 5 percent — so that in 20 years it has been paid off. But the practical result for Habitat homeowners is that they are taking on a debt far in excess of the purchase price (or even the value) of the home — making it nearly impossible to build up any real equity of their own for years or even decades."

In Morgan's case, he had a balance on his primary mortgage at the end of 2010 of about $68,000. The balance on his hidden second was $26,000. Writes Kessler: "That means that, even after several years of mortgage payments, plus hundreds of hours of "sweat equity" labor required of Habitat buyers, Morgan still owed more than $94,000 on the small house he had bought for $75,000 several years earlier."—Bruce Trachtenberg

  • Aleis Tusa

    There is nothing

  • Bruce Trachtenberg

    Thanks for this additional information, and I hope you shared it with author of the story that served as the basis of our summary.

    As Aaron Kessler wrote in his column:

    “The primary reason Morgan faces a financial hit is because of a large ‘hidden second’ mortgage that Habitat attached to his house, and attaches to all of its homes.” He also writes:

    “In Morgan’s case, one of the main factors dragging out negotiations was Habitat’s refusal to even reveal the second mortgage amount to Morgan and his attorney.”

  • Jojo

    I was in the mortgage busness for 20 years and it never ceases to amaze me that people always complain about hidden fees, or “hidden” mortages. Now keep in mind consumers recieve and initail loan package and disclosures, have an their attorney review the sales contract prior to and at closing and yet still say that they did not understand what they signed?

    As usual the homebuying process is very emotional

    Now the chinese drywall-wall thats a whole different issue and a sad situation for any homeowner

  • Russ

    I have two concerns. 1) The home may have been overvalued to arrive at the 2nd mortgage, just to add more incentive to ensure that the homebuyer stays in the house. 2) If the homebuyer was told that the Chinese drywall in the home was safe, that’s fraud. Also, They call fees hidden for a reason. “Fine print”, particularly copious amounts, is intended to defraud. It would take a full time attorney to examine all the fine print unsuspecting consumers are faced with.

  • David Cearley

    If the first mortgage is principal only and the second only needs to be repaid if the owner sells the house, it sounds like buyers get a great deal. While the Chinese drywall is as issue, it looks like the homeowner’s attorney is simply trying to smear Habitat for Humanity in order to get a larger settlement. Why has NPQ chosen to participate I’n the smear campaign?

  • Bruce Trachtenberg

    Since you asked about the terms of the first and second mortgages, here’s what the original said about both:

    “At the end of 2010, Habitat’s attorney sent a letter detailing what he apparently owed on his hidden second: $26,000.

    According to the letter, reviewed by the Herald-Tribune, Morgan’s balance on his primary mortgage was about $68,000. But the balance on his hidden second was $26,000. That means that, even after several years of mortgage payments, plus hundreds of hours of “sweat equity” labor required of Habitat buyers, Morgan still owed more than $94,000 on the small house he had bought for $75,000 several years earlier.”

  • Steve Luten

    Technically the buyer did not buy the home for $75,000, the purchase price is the sum of the first and second mortgage making it more than $101,000 (article did not state the amount of the original second mortgage). A more accurate statement is that the buy owes $94,000 on an original combined mortgages of $101,000+, this seems far less scandalous.