The loan sharks are back. The latest mutation of predatory lending practices is surfacing in US communities that experienced high rates of foreclosure during the subprime mortgage meltdown.
In Chicago's Pullman neighborhood, Adrian Hamilton thought he was buying a house from Vision Property in South Carolina. Instead he signed a "contract for deed" that gave him all of the responsibilities and headaches of a homeowner, including repairs and paying property taxes and insurance, without actually owning anything.
He won't see the title or any equity until he makes his final payment on a 15-year contract. Hamilton spent $12,000 to bring his house up to code, funds he may lose if he misses a payment on his contract.
Consumer advocates are alarmed at the resurgence of these "contract for deed" transactions that fleeced previous generations of aspiring homebuyers and that housing officials believed was snuffed out. Federal agencies, such as the Consumer Financial Protection Bureau, along with city and state officials, are scrambling to understand the scale of the trend and take action to protect residents.
A shameful history hangs over this practice. Because of mortgage discrimination after the Second World War, many black people were pushed into these predatory contacts as the only path to homeownership. Under this arrangement, aspiring homebuyers didn't build equity until the last payment on the contract was made.
If the occupant missed a payment, the seller would repossess the house through forfeiture, stripping the occupants of all the equity they had put in the house. Between 1968 and 1977, thousands of Chicago residents organized the Contract Buyers League to stamp out predatory contract practices by pressuring landlords and lawsuits.
But like a strain of virulent TB that was thought eradicated, this predatory practice has returned. This time, however, the perpetrators are not "mom and pop" landlords, but Wall Street private equity firms.
In the aftermath of the 2008 mortgage meltdown, millions of people lost their homes to foreclosure, particularly across the midwest rust belt states. Fannie Mae disposed of thousands of these properties in bulk sales to Wall Street private equity firms, some with fingerprints leading back to the original subprime mortgage scandal that fueled the meltdown.
The Dallas-based Harbour Portfolio Advisors was one of the biggest bulk buyers, acquiring more than 6,700 homes, mostly in Michigan, Ohio, Illinois, Pennsylvania, Georgia and Florida. Other Wall Street firms snapped up thousands of foreclosed units, including the South Carolina-based Vision Property Management, Battery Point Financial and the St Louis-based Apollo Global Capital.
These Wall Street firms typically don't invest anything to improve these properties, most of which are in terrible condition. Instead, they transfer them to potential buyers through "contract for deed" transactions – sometimes marketed as "rent to buy," "seller financing," or "installment land contracts."
These are not inherently predatory, but opportunities for abuse are plentiful. Such contract arrangements are not subject to the Truth in Lending Act or other consumer protections that most traditional mortgage borrowers enjoy.
"These contracts exist in a regulatory 'no-man's land' between tenant protections and homeowner protections," says Sarah Mancini, an attorney with the National Consumer Law Center. "These aspiring homeowners have neither."
Assuming all the risk, if contract buyers miss a payment, they can lose all the previous payments and investments they've made in maintaining the house. Because they are technically not owners, buyers may be quickly evicted under forfeiture procedure, without the increased protections of foreclosure law afforded to homeowners. Think "repo" of a car, not a home.
Deploying contracts for deed, sellers receive income streams from rundown properties that would be unbankable with traditional mortgages and unsuitable for renting because of code violations. In the most predatory scenario, sellers unload dilapidated houses on unsophisticated buyers with a contract for deed, locking them into an inflated purchase price and high interest rate. After paying out tens of thousands for repairs, a defaulting buyer loses all their equity. The contract lender gets back the house in better condition and repeats the cycle.
"These contracts are the next wave of abuses motivated by corporate profits," says Mancini. "They are exploiting the same communities of color that were devastated by the subprime crisis. This is just the latest predatory product."
In April, the city of Cincinnati began cracking down on contracts for deed, filing a lawsuit against Harbour Portfolio for "predatory and unconscionable" contracts. The lawsuit alleges that Harbour "intentionally fails to disclose known defects about properties, including building code order and other violations". The lawsuit alleges that when contracts fall through, Harbor "churns the property through the process anew". Cincinnati is attempting to prevent Harbour from selling additional homes until the firm remedies outstanding violations.
Members of Congress have called upon the Consumer Financial Protect Bureau (CFPB) to investigate the practices and protect consumers. The CFPB cannot change state property laws, but it can issue regulations requiring contract-for-deed transactions to abide by consumer protection laws against deceptive practices.
Federal lawmakers have also called on the Federal Housing Finance Agency to stop Fannie Mae and Freddie Mac, the two mortgage-finance companies in federal conservatorship, from selling foreclosed homes to firms such as Vision Properties and Harbour Portfolio. On 23 May, Fannie Mae announced it had terminated sales to Vision Property after reviewing the firm's rent-to-own program.
The financial predators will find ways to extract wealth from those aspiring for the dream of homeownership and their neighborhoods. Only with vigilance and oversight can we keep the sharks at bay.