Predatory Land Contract/Contract For Deed Rackets Used By Private Equity Outfits To Peddle Dilapidated Foreclosed Money Pits To Unsophisticated Low-Income Homebuyers w/ Crappy Credit Now On Consumer Feds' Radar

The New York Times reports:

• A revival in seller-financed home sales aimed at people who cannot qualify for a mortgage has started to attract scrutiny from the nation’s top consumer watchdog.
  
  The Consumer Financial Protection Bureau recently assigned two enforcement lawyers to investigate the prevalence of seller-financed home transactions and determine whether the terms of some deals may violate federal truth in lending laws, said two people with direct knowledge of the matter but who were not authorized to speak publicly at the request of federal officials.
  
  The regulator’s interest in seller financing was prompted by discussions between members of the commission staff and one of its advisory boards, the people said. The advisory board began raising questions about seller-financed home transactions in the wake of reports on the subject, including a front-page article in The New York Times on abuses in a marketplace that targets lower-income buyers.
  
  Such contracts proliferated in recent years as banks retrenched from lending to low-income families and private investment firms like hedge funds stepped in to fill the void.
  
  Sam Gilford, a consumer bureau spokesman, confirmed that staff members had conversations with members of the consumer advisory board about seller financing, specifically a type of arrangement called a contract for deed or a land contract.
  
  “We want all consumers to be treated fairly, and we monitor the marketplace to stay apprised of emerging developments in consumer finance,” Mr. Gilford said in an emailed statement. “As part of that work, staff from our research, markets and regulations division have had conversations with members of our consumer advisory board about land contracts.” He declined to comment on whether the agency had assigned two enforcement lawyers.
  
  A contract for deed is a long-term, high-interest installment financing deal.
  
  Actual ownership, or title to a home, passes to the buyer from the seller only after the last payment is made. The contracts, which can run for as long as 40 years, have become widespread in the Midwest and the South, where there are a large number of homes that sell for less than $100,000.
  
  In the wake of the financial crisis, contracts for deed and other seller-financing arrangements have had a resurgence. The foreclosure crisis created a bountiful supply of cheap, often dilapidated, homes for investors to buy and left millions of people with damaged credit histories. Thousands of the homes that are now being sold to borrowers under contracts for deeds were ones that had been foreclosed on by Fannie Mae, one of two mortgage finance firms bailed out by the federal government.
  
  The Consumer Financial Protection Bureau may or may not look to bring any enforcement actions over contracts for deeds and it is only in the early stages of researching the financing model.
  
  The regulator, now nearly five years old, has been seeking to flex its muscles of late. Last week, the Consumer Financial Protection Bureau announced a new rule that would prohibit many financial companies from requiring customers to resolve disputes through mandatory arbitration. The agency is also said to be preparing a new set of regulations for payday loans — high-interest, short-term loans aimed at the same people as those who often enter contracts for deeds.
  
  Contracts for deeds and other seller financing transactions have been around for decades, often used by family members or friends to sell properties to one another. But the arrangements have had a history of being predatory and the terms have often benefited the seller at the expense of the buyer.
  
  Legal aid lawyers in 13 states say that the contracts are being aimed at black and Hispanic homebuyers, according to a national survey undertaken by the National Consumer Law Center. The center has begun to survey housing lawyers in states where these contracts are most commonly used, in part to help determine the effect of new institutional players in the market.
  
  Statistics on the number of homes sold through contracts for deeds are hard to come by because not every state requires contracts to be recorded with the county. It is also not uncommon for borrowers to walk away from homes without contesting a seller’s eviction proceeding in court.
  
  Often issues with homes that are sold through contracts for deeds emerge only once local municipalities bring cases against the sellers. Even then, the sellers sometimes do not show up to court and the code violations on their homes pile up.
  
  Heather K. Way, a professor of law at the University of Texas, said: “This segment of the homeownership market cries out for greater federal oversight. It’s a toxic mix out there of sellers looking to make a quick and easy buck on the shoulders of vulnerable, unsophisticated buyers.” She added, “Unlike bank-financed sales, with seller financing there is typically no outside third party involved in the sale.”
  
  Homes sold through a contract for deed often are put on the market “as is,” meaning buyers must spend a significant portion of their disposable incomes on repairs and renovations. When they do not — or cannot — problems result.
  
  Municipal officials across the United States have complained that out-of-state investors selling properties with a contract for deed often tend to do little maintenance on properties and fall behind on paying property taxes or water bills.
  
  “They do not take care of the code violations with these properties, which is why they are trying to pass them off to other people,” said Jill Steele, city attorney for Battle Creek, Mich.
  
  Ms. Steele said Battle Creek has had a number of code violation issues with Harbour Portfolio Advisors, a firm out of Dallas that is one of the larger national players in the contract for deed business.
  
  Harbour Portfolio bought more than 6,700 single-family homes following the financial crisis of 2008, most of them from Fannie Mae through bulk sales. In recent months, Harbour has sold more than 600 homes with existing contracts for deeds in place to other investment firms and individual investors.
  
  The Consumer Financial Protection Bureau is trying to determine how many other firms are selling homes nationally with a contract for deed already in place or are renting out homes with an option to buy, said the people with direct knowledge of the matter.
  
  Still, there are some in the housing market who think that contracts for deeds and seller-financing plans can help people with no credit get back on the housing ladder.
  
  Odell Barnes, a longtime buyer and seller of foreclosed homes who operates out of Gilbert, S.C., chafed at the idea of government regulation in the industry and emphasized that seller financing contracts were a way to make homeownership accessible to anyone.
  
  “Our government thinks all poor people are stupid,” Mr. Barnes said.

Source: ‘Contract for Deed’ Lending Gets Federal Scrutiny.