“Contract for Deed” Housing Purchases are Predatory and Discriminatory

House and Money with Pad of Paper and Pen

Little Rock   Reports indicate that more than three million people have bought houses under “contract for deed” purchases. Since many, if not most, of these kinds of housing purchases are not recorded, who really knows what the real numbers might be. The one thing that can be certain, is that the happy buyers, meaning the precious few that ever actually end up with a deed, are the very rare exceptions proving the rule that this is a gray, desperate part of the housing market founded on predatory practices and discrimination.

I’m always surprised this part of the housing market is not either strictly regulated or banned. I first encountered such “contract for deed” purchases in Little Rock, Arkansas in 1972 as ACORN mounted its “Save the City” organizing drives neighborhood by neighborhood in the central and eastern parts of the city. Six years before the passage of the Community Reinvestment Act banning lending discrimination based on race among other reasons, it was very difficult for many African-Americans to get mortgage financing historically. On the doors we would regularly run into people involved in “contract for deed” or “rent to purchase” agreements with landlords or absentee owners because of their inability to get bank loans or FHA guarantees in previous years to acquire the home outright. We heard one story after another from older members about either having lost houses or almost lost houses because of some snafu or crisis when their payment was a day late or lost in the mail or whatever. Some were just plain robbed, having paid in cash with no recourse in courts or often even a paper trail. How do you prove the existence of a paternal handshake over a piece of real estate you’ve lived in for 15 or 20 years? We tried to get such sales banned in Little Rock, despite the fact that the real estate industry was the most powerful force in the city.

Many states allow “contract for deed” transactions though they are lightly regulated with almost nonexistent oversight by strapped city housing departments. The Times recently did a piece that highlighted a Dallas-based slumlord named Charles Vose, III, who owns Harbour Porfolio Advisers and has been one of the largest purchases of distressed properties from the government. They reported that,

…Harbour has bought more than 6,700 single-family homes in Ohio, Michigan, Illinois, Florida, Georgia, Pennsylvania and a handful of other states since 2010 — most of them from Fannie Mae, according to the mortgage finance firm and the foreclosure research firm RealtyTrac.

One tale followed another including onerous requirements to repair a home in 4-months or default on the contract purchase, more than 100 times that the company has sued in bankruptcy court, hiring a captive firm to appraise the houses condition sometimes indicating no repairs being needed, all in the service of swindling a lower income family wanting to realize their dream of home ownership but not having the credit under current standards to enter the standard housing mortgage market. We could say that there “ought to be a law,” but in fact there seem to be plenty of laws, including housing code requirements, but nothing stout enough to stop the predatory cycle where a Vose lives in a Dallas mansion by stealing the homes of poor, usually minority families, and everyone else tries to turn a blind eye and shift the problem houses off of their books and onto someone else’s until the exploitative music stops.

The government at all levels shouldn’t allow it and should do the right thing upstream by funding rehab or demolition, rather than allowing the swindlers to operate downstream, hurting even more families and damaging communities, already beleaguered and often blighted, even more so.

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Supreme Court Sinks More Homeowners into Permanent Debt

dead_economy-300x199New Orleans    In a startling unanimous decision, the US Supreme Court overturned an 11th Circuit Court of Appeals decision finding in favor of Bank of America that even bankruptcy protection does not allow underwater homeowners the ability to escape the obligations of second mortgages.  The impact of the decision allows zombie banks to continue operating on the basis of balance sheets reflecting virtually lifeless real estate holdings and makes these beleaguered homeowners into walking dead debtors with virtually no hope of a second chance.The Supreme Court once again reminds Americans that the Constitution is fundamentally about property rights and that the sanctity of a contract trumps all vestiges of common sense.

Generally speaking, a home is commonly classified as “underwater” if the value of the outstanding mortgage is 25% higher than the current market value of the home.  Remember the mortgage we are talking about here is the first mortgage.  The second mortgage is satisfied after the first is fulfilled.  Many of these second mortgages are home improvement loans.  Others arose from the need to finance children’s education or medical emergencies by attaching what has historically been the primary asset creating citizen wealth for the vast majority of low and moderate income families in the country.   Bank of America in their court filings estimated that there were 2.1 million underwater homeowners with second mortgages at the end of 2014.   Others like Zillow estimated that there are still 8 million homeowners who are underwater and most real estate experts estimate that it is likely that half of them have some kind of “second” on their homes.  This is not an insignificant problem in either the economic recovery or the hope for narrowing the equity gap.

Of course not all of these families had declared bankruptcy, partially because banks and others have done an amazing job over recent years with Congress in making bankruptcy both harder to achieve for desperate families and less valuable as a chance for a clean slate and a second chance.  Filing for bankruptcy does not allow someone to wipe out a mortgage debt or a student loan debt for example.  The mortgage obligation is what forces an underwater homeowner into foreclosure.  The best hope for the debtor is that surrendering what used to be an asset to the bank, calls quits to that debt.  In 2007 and 2008 when ACORN was negotiating with big banks and mortgage loan servicers as the implosion began, I was at some of those meetings.Executives then believed that they would just have to wipe out their second mortgage portfolios as worthless.

The Supreme Court’s decisions says, “no way, you’re stuck.”Hey, some day in the by and by, real estate values may go back up, allowing the loan to be collected.  Some of these properties are so far underwater that it won’t be a year but a generation for that to happen.  For the banks paying a dollar on that loan every 90 days allows them to still call it a performing loan, helping their zombie balance sheets, and leaving the debtor, desperate for a clean start, carrying even more weight. The Justices say, “dude, it’s a contract, didn’t you get that?”  The debtors, like millions of others, were on the merry-go-round being pushed by these same bankers and promoters in the real estate bubble into these sucker bets.  These weren’t contracts as much as cons.

Only death relieves some of these debts.It’s already legal for 25% of someone’s social security to be attached.  Now the Supreme Court has just locked another ball and chain onto untold numbers of families with little hope for the future but dragging the weight behind them, sentenced to a life as walking dead, not in debtors’ prison, but in a permanent debtors’ probation of sorts with little or no chance of escape.

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Johnny Cash – Folsom Prison Blues (Live)

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