Sunday, February 21, 2016

Investment firms revive a home sale contract with a racist history

The Times has an exposé today, by Matthew Goldstein and Alexandra Peterson, of predatory investment firms that buy up foreclosed homes, mainly in midwest rust-belt cities as well as in the south, and sell them in uninhabitable condition at huge markups to unsophisticated buyers.

The chief vehicle for exploitation is a sub rosa mode of sale known as a "contract for deed" that leaves actual ownership of the property in the seller's hands while imposing onerous responsibilities on the buyer. Here is how the contract is structured by the largest buyer of foreclosed houses from Fannie Mae's bulk sale program from 2010-2014,  Dallas-based Harbour Portfolio Advisors:
More than a dozen Harbour contracts reviewed by The Times — including Ms. Howard’s — all ran for 30 years, carried a 9.9 percent interest rate and required buyers to bring their property into “habitable condition” within four months. The contracts also contained an arbitration clause to settle disputes between seller and buyer, a stipulation that consumer advocates contend strips buyers of the right to litigate onerous clauses in a courtroom.

Provisions in a contract for deed are enforceable as long as they do not conflict with state law. The home dweller has more limited protections than a person buying a house with a mortgage, and evictions are quicker than a foreclosure. The residents are typically responsible for repairs and paying all property taxes, but the legal title under a contract for deed does not transfer until the final payment is made — an end result that rarely happens.
Nationally, the Times cites an estimate that more than 3 million people have bought homes through a contract for deed.  And that exploitative vehicle has a racist history. Thomas Sugrue, in The Origins of the Urban CrisisRace and Inequality in Postwar Detroit (1997) details the many means by which Detroit's African American population was shut out of the housing market and shut into islands of concentrated poverty.  This kind of contract has pride of place in the narrative:

It was difficult enough for blacks to qualify for conventional mortgages because of redlining practices. But banks also seldom offered loans to blacks who were the first purchasers in a neighborhood, for fear of alienating their white clients and investors, and because they considered racially transitional neighborhoods to be risky investments.As an alternative to conventional financing, speculators offered land contracts to black home buyers who paid a premium through high down payments and often exorbitant interest rates. Land contracts were far less secure than mortgages. Speculators held onto the title of the property until the contract was fully paid off, thus preventing contract holders from building up equity. The combination of high housing prices and above-market interest rates meant that contract holders had to make large monthly payments to meet their debt obligations. If they defaulted, speculators simply evicted them and quickly offered the house to another desperate black buyer. The arrangement brought speculators a handsome profit with relatively little risk (Kindle locations 2620-2626).
Among the more than 6,700 homes that Harbour has bought, mainly from Fannie Mae, are 300 in Detroit. More broadly, the plight of people who have bought uninhabitable homes, sunk large sums into repairing them, and then lost them  "is a scene playing out across the Midwest and the South, where many of the derelict houses have been sold to private investors by government mortgage firms at knockdown prices."

Note, by the way, the place of the arbitration clause in the contract for deed -- one more venue in which U.S. consumers and workers are forced into contracts of adhesion barring fair means of redress.

And so the despoilment of America's middle and working classes continues apace.

I wonder, btw, whether the Consumer Financial Protection Bureau is active on this front. Contracts for deed are legal, but some of their provisions are subject to challenge in some states, as Goldstein and Stevenson report.

Related: Detroit's destruction began in its heyday

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