Monday, July 25, 2016

Predatory Land Contracts/Contracts For Deed Are Built To Fail, Create "Mirage Of Homeownership" For Unsophisticated Homebuyers, Says National Consumer Advocate In New Report

The New York Times reports:
  • Seller-financed home sales are “toxic transactions,” a prominent national consumer law organization said [] as it released a report and called for greater federal and state oversight of the sales.

    In its report, the National Consumer Law Center said that many of the contracts in such transactions were “built to fail” and were predatory in nature — benefiting sellers at the expense of lower-income and minority buyers who could not qualify for mortgages.

    Such a transaction, called a contract for deed or land contract, is similar to buying a home on an installment plan, with a high-interest, long-term loan. For buyers lured by the dream of homeownership, the transactions can turn into money pits that result in a quick eviction by the seller, who can then flip the home again, an investigation by The New York Times found earlier this year.(1)

    The National Consumer Law Center study describes a shadow housing market that has emerged after the financial crisis. These contracts have flourished in communities where there was a large supply of cheap, foreclosed homes and a paucity of mortgages for properties worth substantially less than $100,000.

    “Land installment contracts are popular with investors because defaulting borrowers can be swiftly evicted, and traditional mortgage foreclosure protections do not apply,” the report said. “This allows investors to reap substantial profits.”

    Some state regulators and federal lawmakers are pushing for stronger action to clamp down on predatory seller-financed home sales.

    One of the larger national firms to emerge in the contract for deed market is Harbour Portfolio Advisors. The Dallas company has bought nearly 7,000 homes — most of them from the government-backed mortgage company Fannie Mae — and has been reselling them “as is,” often in need of major repairs, through contracts that critics contend lack basic consumer protections. The Times article in February focused on Harbour Portfolio.

    The National Consumer Law Center looked at 94 homes that Harbour Portfolio had purchased in the Atlanta area and found that the properties were overwhelmingly located in predominantly African-American neighborhoods.

    In one case, Charles Wright, 46, of Lithonia, Ga., spent more than $12,000 on repairs and improvements for a Harbour Portfolio home in 2012. The company then moved to evict Mr. Wright this year after he missed several monthly payments last year.

    Over three years, Mr. Wright paid more than $17,000 toward the balance of the 30-year contract, according to his lawyer and one of the authors of the report. Mr. Wright said he felt misled by Harbour Portfolio, which had bought the home for $11,745 from Fannie Mae.

    “They were wrong for telling me that I was buying a house and then getting me to put all this money in,” Mr. Wright said. “And now they are kicking me out.”
    ***
    The law center report also noted that from the 1930s to the 1960s, contract for deed sales were typically used by home sellers in black communities where mortgages were largely unavailable.

    But then as now, a contract for deed created a “mirage of homeownership,” the report said. It said that the housing lawyers who were interviewed described “marketing schemes that appeared to target African-American and Spanish-speaking consumers.”