Predatory Land Contracts and Rent-to-Own Schemes May be More about Affordable Housing than Home Ownership

Detroit   We had hit the front door a couple of times without success. The house was a single-story white brick facade set back from the street. If we had not been anywhere other than the west side of Detroit, we might have been able to blink our eyes and believe we were in a working-class suburb. We would have had to clear our minds of the vision of driving only minutes before in street after street of neighborhoods where the grass was already knee-high across acres and acres speckled with the occasional occupied house along with some deteriorating ghost structures.

The local public radio reporter rolling with us on assignment from Reveal, the well-regarded national investigative pod-cast operation on the West Coast, offered a weak apology earlier, saying something about hoping this wasn’t all we would see of Detroit. I had replied that I had been here before, and Dine’ Butler, an organizer with me, reminded her that we were from New Orleans, where we had post-Katrina neighborhoods like this as well.

We knew someone was home because the back end of the small SUV was wide open. Dine’ went around the side to the fence, and we quickly met the master of this castle. We knew he was on a land contract purchase agreement with Harbour Portfolio. He had been in the house 2-years, and had looked at a lot of Harbour houses before seeing this one and believing he could make a “go” of it. He had paid about $1500 down payment on a $42,000 purchase price with a 30-year contract at between 12 and 13% interest with monthly payments between $400 and $500. His family had been there for 2 years. He had put in about $7000 cash having to install a new furnace, roof, and wiring, which was still a work in progress. I asked him how he “felt about it,” and he said, “it’s all right for now until something better comes up.” Could he have applied for a conventional mortgage, I asked, and he answered, “not at that time.” He would be glad to come to a meeting and share his experiences and talk to others in the same situation.

The more visits we log, the more that it seems to me we aren’t hearing the responses we might expect from typical home buyers or home owners. Too often when we peel back the layers of these predatory contracts with people, there reaction isn’t surprise and in fact often seems more flight, than it is fight. People are often shocked by how bad their contracts are, but seem to have their eyes wide open to the fact that their housing is substandard. With the average rent in Detroit for a two-bedroom apartment reportedly $1300, many of them seem to almost be doing the math in their heads that even with a down payment and making repairs with sweat equity and cash on hand, they may be in better financial shape in these houses, even if they are at best “works in progress,” and at worse uninhabitable.

We haven’t hit enough doors and talked to enough people yet on the Home Savers Campaign, but listening to people and hearing what they are really saying, there’s no question that these land contract and rent-to-own or lease purchase schemes are predatory, but the crisis we are facing may be less about home ownership in the classic sense, and speaking a lot more to the crisis in available, decent affordable housing. With decreasing public housing units and section 8 vouchers and long waiting lists for both, with rising rents that are taking 50% or more of many household incomes on one hand, and an unforgiving post-2008 credit desert on the other with higher down payments, higher credit scores, and higher bank lending requirements, a lower income, working family may find themselves caught in the middle where a bigger place in rougher condition for lower monthly rent and pay-as-you-go repairs comes to look like a deal worth taking, everything being unequal. Heck, they may figure, there’s a slim chance, like playing the lottery, that they might even own the house some day…a carrot later, while being beaten by the sticks now.

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“Option to Buy,” another Twist on Predatory Purchase Schemes

Detroit   Preparing for the Home Savers Campaign teams to hit the doors in Detroit and visit with victims of the various installment land purchase and rent-to-buy schemes in the city, a crew of us sat down for a preliminary briefing with Joe McGuire, a staff attorney with Michigan Legal Services who has tussled with a number of these companies while representing their low-income clients. Joe was a fount of information and couldn’t have been more helpful, but much of what he told us was depressing in the extreme.

Perhaps what demonstrates this bleak credit desert for lower income and working families in the Motor City most vividly are the terms of one lease he shared with us promulgated by a company called Bean. It’s hard to make a rent-to-own agreement look good, but the Bean agreement was a “residential lease and option agreement,” which, when read closely, was really only a one-year option to buy the property with absolutely no guarantee that the agreement would be extended past the one year allowing the “lessor” to finally purchase the home, even if they had met all conditions of the agreement perfectly, unless of course they magically came up with the full purchase price within 30 days of the end of the lease. The mishmash of legalese really was simply a one-year ripoff and an option-to-steal by the lessor from the lessee. The terms started with a $4000 down payment for the “privilege” of purchasing the house for $30,000. An additional “option consideration of $130 per month” would be paid toward the “down payment/purchase” of the property as well as $645 per month throughout the one-year term which was the lease on this “as is” house. Any repairs, “major and minor” would be paid for by the “optionee,” and if any are paid by the “optioner,” they are added onto the purchase price. McGuire was as stunned by the agreement as all of us were.

Much of what he told us was equally bleak. The city requires an effective warrant of habitability before people move in, and all rental units, including those on rent-to-own contracts are required to be registered, but it became clear there was little to nonexistent enforcement. Even so, McGuire felt the protections for rent-to-own were better than those for land contracts, because they were even better shielded by state law with little thought that the legislature would improve them. In a sobering catch-22, McGuire actually made the case as we were leaving that he worried that tightening down on rent-to-own abuses might lead to more land contracts, which given their legal protections would be even worse for the victims. Forfeiture to the city and the Detroit land bank seemed equally fraught and neighborhood crippling.

The conversation was not without some rays of hope. Work by some of the anti-eviction groups was encouraging. Data being prepared in cooperation with local universities and professors might offer some opportunities. Focus on concentrated neighborhoods where this kind of activity might be curtailed, McGuire felt could show results.

The odds were long, but we were welcomed into the fight. Any push back would be a positive. Any effort to force more accountability by victims would be helpful. Detroit might be ground zero for this campaign, but there were mountains to climb with uncertain footholds on every route.

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Citizen Wealth in Home Ownership is Becoming Citizen Inequity

New Orleans   A couple of years ago I wrote a book called, Citizen Wealth: Winning the Campaign to Save Working Families. It was commonly known that for low-and-moderate income families the largest index of any wealth they possessed was based on whether or not they had managed somehow to become a homeowner. At ACORN we had fought that battle for years in order to get banks to fairly offer mortgages to lower income families so that they could acquire single-family homes or coops, and in those fights had won billions allowing millions to own their own homes. It was certainly not enough to achieve any semblance of equity, but it was a good step forward, particularly increasing the home ownership percentages of African-American and Latino families to record levels, although almost all of those gains were wiped out by the 2008 Great Recession.

In doing the research for the book, I was shocked that the largest so-called social program in the nation’s budget, dwarfing direct welfare, food stamps, and all other housing benefits, both singly and collectively, was the mortgage interest deduction, which now totals more than $70 billion annually. As disturbing was the degree to which the mortgage interest deduction was largely not a social program which benefited the citizen wealth of lower income families but was disproportionately benefiting middle class and wealthy families. After all, at the threshold where such an income tax deduction had real financial weight and meaning, a family had to be in an income bracket high enough to justify itemizing their deductions.

As the Home Savers Campaign this year has visited with families in a number of cities in the Midwest and South, it has also struck all of us that as blatantly predatory as many of these contract for deed and rent-to-own scams have been to the families victimized by them, many of these families have accepted the risks even accepting the dangers and the deceit, simply because they were desperate for housing they could afford, no matter its condition. For the same reason, the reaction of many victims when they realize they have been swindled has often been as much anger as it has been resignation, and a feeling they should walk away, rather than fighting for justice for their investment, all of which speaks to the crisis in affordability.

Reading “House Rules” by Matthew Desmond in the New York Times there were more facts and figures that underlined the affordable housing crisis which is driving income and racial inequality throughout the country. Some facts:

  • The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter at $5400.
  • With rising housing costs the housing standard where 30% or less of a family’s income equals affordability, half of all poor renting families spend more than 50% of their income on housing costs and 25% spent more than 70%.
  • In 2011, the median white household had a net worth of $111,146, compared with $7113 for the median black household and $8348 for the media Hispanic household. If black and Hispanic families owned homes at the same rate as whites, the racial wealth gap would be reduced by almost a third.

There was much more, but you get the point. Worse, the consensus is that there is no political constituency for reform of the mortgage interest deduction, nor in the absence of reform an equivalent program or benefit that would help renters or bring balance to this wealth and racial inequality.

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Alternative Mortgage Lending Tiptoeing Around a Broker-based Implosion – Again!

REUTERS/Chris Helgren

New Orleans   In the 2008 Great Recession, fingers pointed wildly in all directions and in some cases in little Taliban caves around the country they are still doing so, and trying to play the blame game at the expense of the victims. One of the more troubling terms to emerge from those terrible days for borrowers trying to stay in their homes was the notion of “liar’s loans,” as the subprime industry called some of these mortgages. The haters tried to claim the borrowers were the liars, though our work repeatedly found that the culprits – the big liars in the affair – were almost invariably mortgage brokers channeling huge volumes of paper to subprime lenders and blowing up the numbers on “stated” income mortgages.

ACORN understood the value of stated income mortgages because many of our lower income families worked in contingent employment that was impossible to verify because of cash transactions without social security statements. Tipped employees were just one of the examples. As we met with subprime company after subprime company (four in one wild day in Orange County, California, the subprime ground zero!), we raised our concerns about the supervision of brokerage networks accounting for much of the loan volume in the portfolios they were assembling and the incredibly high percentage of stated loans, often approaching or exceeding 50% of the lending they were making and packaging. They would then flannel-mouth something about a risk algorithm that was protecting them and assure us they were on top of it all, when in fact as it developed, they were doing the happy dance to bankruptcy and blindsiding our members, many of them whom had no idea what numbers brokers had claimed to be their income, often without so much as a wink-and-a-nod, and were shocked to find in some cases that their social security income had now been converted to six figures.

All of ACORN’s fights against predatory practices by subprimes came roaring back to mind when ACORN Canada shared an article with me about the cash-crunch and turmoil that ousted the top officials and plummeted the share price of Home Capital Group, a leading company in what the Financial Post called the “alternative mortgage lending” space, which is just another name for subprime loans. The problem was simply described:

Home Capital’s current crisis began on April 19, when the Ontario Securities Commission accused the company and some of its officials of misleading disclosure. The OSC alleges that the company misled shareholders because it knew there was fraud in its broker channels before July 2015, when it announced the findings of its internal investigations and disclosed it had cut ties with 45 brokers as a result.

The Post commentators were aghast that regulators were investigating Home Capital for what they viewed as dated and minor problems with the company’s brokerage channels and accused the OSC of what Republicans in the US would now call “regulatory overreach.”

How quickly people forget! The Ontario Securities Commission fortunately had some memory cells left from watching the real estate American meltdown a decade ago, and recognized what US regulators have still failed to grasp in the patchwork quilt that regulates and licenses brokers in this country on a state by state basis. Broker fraud is inevitable in the mortgage supply chain whenever brokers are substantially paid by commissions based on closings, rather than standards that include buyer affordability. We always demanded, and often won, though sometimes too late, agreements that US-subprimes not allow mortgage brokers in their networks to be paid that way. Given the hammering of stock prices for all the companies in the Canadian subprime industry, smarter investors must suspect that all of them are only loosely supervising brokerage networks, and that’s scary.

Low-and-moderate income families need a subprime market so that they can access mortgages for houses and apartments, but they also have to demand that the companies not be predatory and that they work as hard to keep their acts together as families do who are busting their butts to pay their bills and their house notes. Let’s hope Canadians are coming to grips with these companies and have learned the lessons that Americans are living in denial and still trying to forget.

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Predatory Lenders Making American Nightmares From American Dreams

Greenville   Here’s a guest blog run on the workingclassstudies.wordpress.com blog for Working-Class Perspectives shepherded by Professors Sherry Linkton of Georgetown University and John Russo, Visiting Scholar of the Kalmanovitz Initiative for Labor and Working Poor at Georgetown, and formerly of Youngstown State University in Ohio.

Posted on May 1, 2017 by Working-Class Perspectives

Yes, Donald Trump is President, and he accomplished this upset in part by shattering the working-class firewall in long time Democratic, heartland strongholds of Pennsylvania, Michigan, and Ohio. We cannot respond only with resistance.  An effective defense, in the Rust Belt or anywhere else in the country, requires a deeply rooted offense focused on the traditional Democratic working-class base, and that requires organizations and organizers who will to listen and offer meaningful responses to real pain being felt by so many at the grassroots level.

Amid repeated promises from the White House and Republicans to cut from healthcare, Medicare, and other elements of the already tattered safety net, there are few issues so stark, or so predatory, as the credit desert that keeps working families from securing decent and affordable housing. This is a problem the Real Estate Developer-in-Chief should well understand.

Since the 2008 Great Recession, the devastation of foreclosures, for individuals and communities, has become well-known.  Less appreciated has been the banks’ response. As the subprime market ended, many lenders now demand higher credit scores, larger down payments, and higher minimum loan levels for mortgages.  Marginal financial institutions, specializing in predatory products, moved in, reviving instruments that had largely disappeared from urban home ownership markets with the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977, laws that also ended redlining in minority communities.  Contract-for-deed, installment land purchases, rent-to-own, lease purchase, and other deceptively-named transactions lured families into hoping for affordable housing and home ownership into agreements that exploited them instead.

Worse, much of the housing stock involved was had been acquired from Federal National Mortgage Authority (“Fannie Mae”) auctions of foreclosed properties by hedge funds, Wall Street, and vulture financiers pyramiding one injury on top of another.  Companies like Harbour Portfolio embraced contract “sales,” while others, such as Vision Property Management, repurposed thousands of homes using rent-to-own scams.  More well-known operators, like Goldman Sachs, bought more than 26,000 homes to satisfy securitization settlements with the government, while Apollo has specialized in similar flip-and-trick in Memphis and other cities.  The National Consumer Law Center estimates that there are more than six million contract buyers in the United States now.  More shockingly, more contract sales were recorded in Detroit last year than traditional mortgage transfers.

Organizers with ACORN  and the Home Savers Campaign  have spoken with lower income working families in Philadelphia, Pittsburgh, Youngstown, Akron, Detroit, and other cities as diverse as Memphis, Little Rock, and New Orleans. These conversations reveal huge issues that bring this emerging housing crisis into tragic relief and demand action and response.   The stories are heartbreaking.

A Harbour Portfolio buyer spoke to us from her couch, where she was recovering from a fall on a faulty stairway in Pittsburgh.  In Akron, another Harbour Portfolio purchaser told us about the ceiling in the shower falling on his sister, leaving her unable to work.   A Vision Property Management family in Pittsburgh told us of moving into a house after signing the papers only to find that it had no plumbing or electricity. They were forced to “camp” in their house for six months.  Vision’s callous indifference to the deplorable condition of the housing stock meant that one Youngstown family had been forced to move to a second Vision house because their first was ordered demolished by the city!  Many of the buyers were on Social Security or Veterans payments.  Meanwhile, one Harbour buyer was having problems getting the contract in his name — even though the payments were made from his pension.

Sadly, this story from Philadelphia is typical, as the organizing team’s notes reveal:

Maria Rodriguez and her husband “purchased” the house at 917 Sanger St., in the Frankfort section of Philadelphia for $65,500, almost 4 years ago.  They both worked:  he as a landscaper and she worked at a hotel doing housekeeping. . . .   They put down $2000, plus $465 as the monthly lease payment, $105 for real estate taxes, $30 for general liability insurance, or $2600 as an initial payment and $600 a month. The contract runs until August 2020.  $57.06, +2000 initial option, of the monthly payment is credited toward the purchase price.  Maria and her husband have put about $25,000 in the property because of huge issues like unpaid water bills, no heating or electrical system. They believed that at the end of the contract, in 2020, they would own the property and get the deed.  Instead, they will have paid $6,793 toward the $65000 house price.  On Aug 30, 2020, they have 3 options:  give Vision a check for $58,206, walk away, or convert to seller financing with a new contract for the remaining $58K.  Like all the Vision properties people we’ve talked to, this was a total surprise.

At the end of our visits with working families, we often left people enraged by anger salted with tears.

Laws to protect would-be buyers vary state-to-state, and many are weak. Are these “buyers” tenants, or are they owners without a deed?  Many they cannot connect utilities or get contractors to work on their houses because of the confusion.  Although contracts are required to be filed, they usually are not.   In Green Bay, Wisconsin Vision whistleblowers told television reporters that they were instructed not to pay sales taxes or transfer fees.  The city of Cincinnati sued Harbour for $335,000 of uncollected fines and penalties.

Some cities have taken action. Toledo passed an ordinance requiring contract sellers to obtain a certificate of occupancy and habitability before a contract was executed and a potential buyer allowed to move into a property. Lorain, Ohio, required the same, but only at the point of sale, which sadly may never happen.  In Pennsylvania, lawyers believe there is an “implied warrant of habitability” that should force sellers to make repairs before occupancy.  Other lawyers argue that none of these agreements can be valid contracts because their terms are “unconscionable” on their face.   The Uniform Code Commission is debating offering state legislators a model law to clarify some of the mayhem.

As the Home Savers Campaign and partner organizations get their arms around this issue, one thing is clear: these contracts are misrepresented and rarely understood by working families desperate to obtain affordable and decent housing with the opportunity of home ownership.  Millions of families are now caught in this dilemma. For them, the American Dream turns out to be an American Nightmare.

As our campaign against these predatory practices gains traction and the raw exploitation involved becomes even clearer, and as more working families demand justice, it will be harder for anyone or anybody to deny the exploitation at the root of these transactions.

Real estate is perhaps one thing that President Trump does understand.  The fight needs to move from these houses to the White House.

Wade Rathke

Wade Rathke is best known as Founder and Chief Organizer of ACORN from 1970-2008, and continues to serve as Chief Organizer of ACORN International working in 13 countries.

Special thanks to Gary Davenport, former community organizer and currently with Mahoning County Land Bank for assistance in Youngstown work.  We’ll have more to say about Youngstown as we assemble the data later this summer!

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Cities and Neighborhoods Catch a Break in Beating Banks

New Orleans   In a rare surprise over the dozen years that conservative US Supreme Court Chief Justice John Roberts has run the nation’s highest court, he joined the four more liberal justices on an issue, delivering a 5-3 vote. Even more shocking the decision was a slap in the face to big banks, in this case Bank of America and Wells Fargo, on a complaint brought by the City of Miami. The court ruled that Miami had standing to sue and to further pursue its claims concerning the discriminatory lending practices of these banks and their allegation that such practices led to decreased property values in neighborhoods, and therefore reduced property tax revenue to the city as well as increasing blight in the community.

This is big, really big, because it powerfully opens the door to a broader interpretation of the Fair Housing Act and its prohibitions against racial discrimination in preventing different standards between one neighborhood and another in cases like redlining, but it also speaks to differing and discriminatory standards in mortgage lending because of income as well, which was at the heart of broker driven exploitation that fueled abuse and outright fraud in the subprime market. There can’t really be too much doubt that Bank of America and Wells Fargo didn’t pause to even take a breath in lower income neighborhoods as they altered their supervision and standards willy-nilly to drive volume on refinancing as well as new purchases much as often as new purchases. Wells Fargo has already become poster child for not supervising its sales staff, but neither does the record of Bank of America and Wells improve when examining the way that they mishandled mortgages underwater during the Great Recession, exacerbating foreclosures.

There’s settled evidence that property values decrease when homes are abandoned in communities, and foreclosures in Miami and other cities led to increased abandonment. The scandalous disregard that big banks showed in refusing to modify the mortgage terms to prevent foreclosures as well as paying little attention to managing and maintaining the properties where they were foreclosing directly lowered values in those properties and whole neighborhoods. Miami has the lead role in proving this now that the Supreme Court has sent the case back down to Atlanta and the 11th Circuit Court of Appeals, and clearly the odds are still stacked against the city and favor the banks, but the door is open and common knowledge and a drive-by to any lower income community establishes the facts on the ground.

The banks are hoping they can prove that they were just one of many crooks, and not the ones pulling the trigger to rob the neighborhoods of their value. In criminal courts this might be a case where the banks might not get a sentence for murder, but they would definitely do time for manslaughter, because there is no doubt that they hurt these communities and the people who live there, whether they were driving the getaway car, acting as the lookout, or holding the gun.

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