Alternative Home Financing is a Big Problem

Financial Justice Housing Ideas and Issues
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            Marble Falls       It’s not exactly one that got away, but it’s definitely one that has kept biting people hard.  I’m talking about the ways low-and-moderate income families are forced into alternative financing schemes in order to put a roof over their heads.  Several years ago, the ACORN Home Savers Campaign went after a bunch of companies who were hawking a form of lease-purchase programs, like Vision and Harbour, that were contract purchase agreements in some cases and knocking on the door as predatory in many cases.  We had thought that CRA and HMDA had pushed these kinds of schemes to the bottom of the barrel since their passage in 1977, thanks to our work and many others, but we were wrong.  Research showed that they still accounted for about 4% of the market.  Sadly, at the low end of the market, where many of our members and a ton of our constituency live, these home financing alternatives are still alive and kicking.

I’m reminded of all of this after seeing something come over the transom recently from Pew Research.  In the absence of real data since 2009 when the Census Bureau stopped asking the question about these kinds of financing products, Pew reported on a large survey on how many folks were still being forced into these financing systems.  What they found is important, but it isn’t pretty:

  • 36 million Americans, or 1 in 5 home borrowers, have used alternative financing at least once—and many have used both at different times.
  • Roughly, 1 in 15 current home borrowers—around 7 million U.S. adults—currently use alternative financing.
  • Among borrowers with active home financing debt, those with annual household incomes below $50,000 were more likely to use alternative financing.
  • Personal property loans were the most common alternative at 11%, with lease-purchase agreements (6%), seller-financed mortgages (6%), and land contracts (5%).
  • Hispanic households that have financed a home purchase are more likely to have used alternative financing compared with other households: 34% of Hispanic borrowers reported using at least one alternative arrangement compared with 23% of non-Hispanic Black borrowers and 19% of non-Hispanic White borrowers.
  • Almost one-quarter of families that have used one alternative method, have used another as well.

You get the picture.  Banks don’t generally make small mortgage loans under $150,000, so people have little choice.  Banks don’t like making personal loans to lower income families.  Manufactured homes for example are classified as personal, not real property, in most states adding another degree of difficulty.  About three-quarters of mobile home owners are renting from property owners, but even the quarter that own the land underneath their home are rarely able to combine them into a mortgage.  Adding to the predatory edge to these alternative financing products is the fact that interest rates are often double what a mortgage would fetch, so poorer families are paying more for less.

The bottom of the home ownership barrel is a bad place to be.  In the ACORN Home Savers Campaign, we found there had been another piece of bad news as well.  Many families were entering these agreements with no expectation of ownership, but simply because they were desperate for something that they could call lower rent.

Pew calls from more data to be collected once again, and we support that, but there needs to be real regulation at the state and federal level of this part of the financial and home buying market, because abuses are common, and the opportunity for abuse is abundant, especially since no one is looking, and seemingly few even care.