Law Center Calls Seller-Financed Home Sales ‘Toxic Transactions’


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A Harbour Portfolio property in Akron, Ohio. The company uses installment sales contracts.

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Michael F. McElroy for The New York Times

Seller-financed home sales are “toxic transactions,” a prominent national consumer law organization said on Thursday as it released a report and called for greater federal and state oversight of the sales.

In its report, the National Consumer Law Center said that many of the contracts in such transactions were “built to fail” and were predatory in nature — benefiting sellers at the expense of lower-income and minority buyers who could not qualify for mortgages.

Such a transaction, called a contract for deed or land contract, is similar to buying a home on an installment plan, with a high-interest, long-term loan. For buyers lured by the dream of homeownership, the transactions can turn into money pits that result in a quick eviction by the seller, who can then flip the home again, an investigation by The New York Times found earlier this year.

The National Consumer Law Center study describes a shadow housing market that has emerged after the financial crisis. These contracts have flourished in communities where there was a large supply of cheap, foreclosed homes and a paucity of mortgages for properties worth substantially less than $100,000.

“Land installment contracts are popular with investors because defaulting borrowers can be swiftly evicted, and traditional mortgage foreclosure protections do not apply,” the report said. “This allows investors to reap substantial profits.”

Some state regulators and federal lawmakers are pushing for stronger action to clamp down on predatory seller-financed home sales.

One of the larger national firms to emerge in the contract for deed market is Harbour Portfolio Advisors. The Dallas company has bought nearly 7,000 homes — most of them from the government-backed mortgage company Fannie Mae — and has been reselling them “as is,” often in need of major repairs, through contracts that critics contend lack basic consumer protections. The Times article in February focused on Harbour Portfolio.

The National Consumer Law Center looked at 94 homes that Harbour Portfolio had purchased in the Atlanta area and found that the properties were overwhelmingly located in predominantly African-American neighborhoods.

In one case, Charles Wright, 46, of Lithonia, Ga., spent more than $12,000 on repairs and improvements for a Harbour Portfolio home in 2012. The company then moved to evict Mr. Wright this year after he missed several monthly payments last year.

Over three years, Mr. Wright paid more than $17,000 toward the balance of the 30-year contract, according to his lawyer and one of the authors of the report. Mr. Wright said he felt misled by Harbour Portfolio, which had bought the home for $11,745 from Fannie Mae.

“They were wrong for telling me that I was buying a house and then getting me to put all this money in,” Mr. Wright said. “And now they are kicking me out.”

In an emailed response, a representative for Harbour Portfolio said: “We have worked hard to resolve any issues with him in the past and we will continue to look for a solution.”

The representative added, “Harbour welcomes the opportunity to work with government authorities to create a specific framework for this industry.”

The law center report also noted that from the 1930s to the 1960s, contract for deed sales were typically used by home sellers in black communities where mortgages were largely unavailable.

But then as now, a contract for deed created a “mirage of homeownership,” the report said. It said that the housing lawyers who were interviewed described “marketing schemes that appeared to target African-American and Spanish-speaking consumers.”

The report urges the Consumer Financial Protection Bureau to take the lead in pushing for “comprehensive regulation” or pursuing enforcement actions against sellers who use predatory contracts. The federal consumer protection bureau has jurisdiction over seller-financed transactions.

It also recommends that all land contracts be recorded, that they use the same standard contract and that sellers be required to pay for an independent appraisal and inspection of the home before a sale.

In May, seven Democratic United States senators led by Richard Blumenthal of Connecticut and Sherrod Brown of Ohio wrote to the bureau, expressing concern over the lack of consumer protections for low-income home buyers in contract for deed financing. Richard Cordray, the bureau’s director, said in response that he shared the lawmakers’ concerns but noted that the bureau was still gathering information to determine the scope of the problem.

The authorities in New York sent subpoenas to several companies this spring to determine how prevalent such contracts were in the state. The Missouri attorney general in late May issued an alert warning residents to be wary of abuses with contract for deed sales.

New Mexico officials are also investigating reports that contract for deed home sales are targeting immigrant and Spanish-speaking populations, according to Hector Balderas, the state’s attorney general.

“In my review of the issue there is no effective government oversight in measuring the scope of the problem,” Mr. Balderas said. “Nobody is monitoring the scope and size of these real estate contracts.”

But the contracts and other forms of seller-financing deals have strong supporters, too.

Several nonprofit organizations are using contract for deed sales to help those who have poor credit find a path to homeownership. Historically, such contracts have been used by people to sell their homes to friends and relatives.

Several legislators introduced a bill in the House of Representatives in May that would relax some of the rules for companies that enter into fewer than 24 seller-financed transactions in a year. The measure would amend a provision in the Dodd-Frank financial reform law that requires companies engaging in contract for deed sales to register as mortgage originators.

“We know a lot of folks who are unbanked or unbankable — you can’t fit a square peg in a round hole — and that is where seller financing comes in,” said Charles Tassell, a member of the Seller Finance Coalition, a two-year-old group that has lobbied for the bill.

“If seller financing isn’t a good deal for both sides,” he said, “it is not going to succeed.”

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