Home Buyback Also Reveals Hidden Habitat for Humanity Lending Practices

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