April 17, 2016; New York Times, “DealBook”
In the wake of the Great Recession, NPQ reported on Wall Street financial corporations buying up foreclosed houses and turning them into single-family rentals. Now, the New York Times reports that a new crop of Wall Street financiers are repackaging formerly foreclosed houses and offering to sell them on land contracts aimed toward low-income families who cannot obtain a conventional mortgage.
A Times story on April 17th focused attention on a real estate practice that writers Matthew Goldstein and Alexandra Stevenson call “contract for deed.” Contract-for-deed arrangements are traditional and common business transactions for smaller agricultural real estate sales when the buyer and seller are dealing directly, without a bank or other third party acting to finance the transaction.
In residential home sales, where the purchaser is usually not a farmer or businessperson familiar with the practice, contract for deed can be used in a predatory manner. Unlike a conventional rental, where tenants can expect landlords to maintain properties, these homes are sold “as-is” at prices above their appraised value and often with exorbitant interest charges. In one example, investors who bought foreclosed homes at an average price of $8,000 “sold” an Akron, Ohio, property for $36,300 at 10 percent interest, Instead of a refundable security deposit, a contract buyer pays a “down payment” and sometimes other fees.
Unlike a conventional home purchase, the contract buyers don’t get a title (security interest shared with the financing entity) to the property until all the installment payments are made. Therefore, if a payment is missed, the contract sellers can simply evict the contract buyer without going through a lengthy foreclosure process. In an editorial on April 29th, the NYT Editorial Board succinctly described how the contract-for-deed business works:
These contracts enriched the sellers by draining the buyers, who built no equity and were often evicted for minor or alleged infractions, at which point the owner would enter into a contract with another buyer. In the process, families and neighborhoods were ruined.
The editorial also explores the racist roots of the practice in distressed urban communities, back to a time when African American families were steered into this bogus form of homeownership in neighborhoods ineligible for federal mortgage insurance.
An earlier NYT article by the same writers examined the experiences of contract buyers in Akron and Detroit, Michigan, where Harbour Portfolio Advisors was a major player. “Ten of the more than 50 homes Harbour bought in Akron have been torn down after being condemned and two others are slated for demolition,” according to city housing official Duane Groeger.
It is ironic that Harbour obtained its stock of houses from Fannie Mae, the government-sponsored enterprise that went belly up in the Great Recession and is now in federal receivership. Fannie Mae moved back to profitability by unloading hard-to-sell properties in bulk sales despite protests around the country. In this earlier article, the authors note, “Harbour, which raised more than $60 million from wealthy investors, was the single largest buyer of foreclosed homes from Fannie Mae’s bulk sale program from 2010 to 2014.”
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As far as code compliance goes, “Mr. Groeger said getting Harbour to respond to outstanding code violations on homes had been ‘an exercise in futility.’” Reading the two NYT stories together suggests that Harbour is moving out the business of selling to homeowners and selling instead to new companies entering the contract-for-deed business.
Besides the NYT coverage, news about this emerging business model is leaking out in some other media stories. On April 7th, the business magazine Crain’s New York Business profiled another of these Wall Street financers, Apollo Global Management, and described the business model as “shadow banking.”
As the biggest banks retreated from mortgage lending, and the market for riskier borrowers dried up, firms such as Apollo—so-called shadow banks—have filled the void. Whether the process is called a land sale, contract-for-deed, bond-for-title or something else, the idea is the same: While it gives some low-income Americans a path, though long and winding, to homeownership, it can also be a way for investors to profit from borrowers who don’t qualify for mortgages.
In response to these stories, the NYT Editorial Board called on the Consumer Financial Protection Agency to take jurisdiction of this business.
The Consumer Financial Protection Bureau must assert its authority over these contracts, which are legally murky and hard to track. Some states do not require that they be recorded, and in states that do, noncompliance is high. The bureau’s mandate is to stop unfair, deceptive or predatory lending. Contracts for deed are all three.
Community leaders anxious to rebuild a base of homeowners may be caught by surprise by a business model that may be perverted to promote the downward spiral of already troubled communities. The article in Crain’s New York warns:
A 2012 study on people with the agreements in Maverick County, Texas, showed that 45 percent of them were canceled within a 23-year period, an indication that many residents lost money on the deals. Fewer than 20% of the people with contracts ever became full owners of the properties, according to the study by University of Texas at Austin. While these types of agreements can sometimes benefit buyers with no other avenues to homeownership, they have a “predatory history,” particularly in minority communities, said Sarah Edelman, director of housing policy at the Center for American Progress in Washington.
At the very least, contract-for-deed transactions should be subject to consumer education requirements like those developed for reverse mortgages, where purchasers are required to receive third-party consumer credit counseling and education sessions about the pluses and minuses of the transaction before signing a contract.—Spencer Wells