Millions Are Using Risky Ways To Try To Buy An Affordable Home: NPR
Five years ago, Donald Strayer thought he had bought a dream home for his extended family. It was on a pretty spot in the foothills of Ohio’s Appalachian Mountains, with room for him and his wife, his daughter’s family, and their horses and goats. And he could actually afford it.
Strayer had been turned down for a bank loan because of bad credit – he says it was because of hospital bills years ago. The 58-year-old former forklift driver suffers from chronic lung disease and lives with a disability. Instead of an ordinary mortgage, he signed what is called a land contract directly with the seller.
The price was $39,900. For a down payment, he sold his childhood home, which he inherited when his father died, “the only thing I had in the world.”
For years, he made monthly payments of $350 on his new home. And then “one day the sheriff came,” he says. “It was seized and they wanted to take my property.”
It turned out that the seller’s family – to whom Strayer had sent his payments – were keeping the money instead of paying off the mortgage. This left Strayer a major investment, with no equity and no legal ownership rights.
Land contracts and other types of alternative financing have been around for a long time, with roots in the race-based red line that has kept black Americans from accessing traditional mortgages. But legal aid experts say they became more common after the Great Recession and housing and rental costs soared. They may be the only option for some, but these alternative arrangements pose a financial risk for families who have the least to lose.
“For many American families, home ownership has been the greatest source of wealth over the past century,” says Tara Roche of The Pew Charitable Trusts. “Mortgages are a key step in achieving that financial security.”
People of color and those in rural areas are more likely to use these risky arrangements
A first-of-its-kind national survey by The Pew Charitable Trusts finds that 36 million Americans – about 20% of all borrowers – have used alternative means to finance a home at some point, including 7 million currently in such arrangements. . Borrowers are largely low-income, more likely to live in rural areas, and disproportionately Hispanic and black, reflecting the racial gap in homeownership.
Unlike mortgages, alternative financing arrangements are usually not registered with any government office. They do not start with a bank or mortgage company and therefore are not subject to the same state or federal regulations.
“In most of our cases, we have handwritten notes that wouldn’t pass the mark,” says Peggy Lee, an attorney with Southeast Ohio Legal Services. She says some of her clients have even been duped into thinking a verbal contract is binding, despite not being recognized in Ohio.
This leaves borrowers with higher costs and fewer protections. They can be suddenly evicted without being entitled to normal foreclosure proceedings. They are excluded from tax and other benefits for owners. Legal ambiguity has prevented many people from being eligible for COVID-19 financial relief or the eviction moratorium, creating a double whammy for families most likely to suffer during the pandemic.
Another crucial distinction: generally the seller retains the deed until the last payment, but the tenant is responsible for maintenance and repairs.
Laura Ziegler / KCUR 89.3
In 2014, Marisela Orozco signed a contract to buy a house from a friend’s colleague in Kansas City, Missouri, for $22,000. At the time, she didn’t have permission to live in the United States, spoke little English, and didn’t understand how title deeds worked.
The house was in poor condition, Orozco told member station KCUR and the Midwest Newsroom, which investigated the high prevalence of such arrangements in the area.
“The walls are unfinished. A small part of the bathroom is finished. No good plumbing,” she said. “But I say, ‘OK’, we’ll fix it.” And I’m moving in with my kids, fixing things little by little when I have the money.”
But after 44 months of regular payments and more than $10,000 in home improvements, the owner disappeared, never giving Orozco title to the house.
Repeat offenders engage in profit-driven ‘churning’
Legal aid lawyers say they have seen more alternative financing since the subprime mortgage crisis of 2008, when millions of people lost their homes to foreclosure. Big investors bought the homes in bulk, many of them in poor condition and in economically distressed areas, then marketed alternative financing schemes to resell them.
Several state attorneys general have filed lawsuits alleging deceptive practices. Pennsylvania recently won a partial victory when a judge ordered that 285 homes be immediately turned over to people who had signed alternative tenancy agreements.
Some experts worry about the possibility of another spike in the wake of the pandemic, as mortgage bailouts and moratoriums expire and foreclosures begin to rise.
In rural Ohio, attorney Lee says, given the severe housing crisis, a run-down house may be the only one some people can afford. But she finds it distressing to see clients invest thousands of dollars to repair a home, thinking it will pay off, when the seller never really intends to hand it over.
“They just want to shift the burden of repairs into thinking they’re going to build some sort of home equity,” she says. “And then, oops, the first time something goes wrong…they’re in eviction court.”
The Pew survey finds plenty of repeat offenders, calling it profit-driven “churning” when a homeowner initiates the sale of the same home multiple times.
States are starting to consider more protections for borrowers
Since it is difficult to track alternative financing methods, there is a lack of data on who uses them, where they live and what their experiences are. Pew’s Roche hopes that the information in the survey “may help inform policy makers, who are considering policies for alternative home finance borrowers.”
Some states have attempted to better protect consumers, and Roche is seeing an increase in bills this year.
Sarah Mancini of the National Consumer Law Center would like to at least make sure a house is livable, the same protection a renter would have. And if something goes wrong, she says there should be a process closer to foreclosure, so tenants don’t run the risk of a sudden eviction.
Beyond that, Mancini would like to see traditional and smaller mortgages more available and less difficult to get approved.
“We know there is a racial wealth gap. We know people of color are more likely to have experienced a motor vehicle accident at some point that may have caused a default,” she says.
Instead of requiring an “unreasonably high credit score,” she says, lenders should consider someone’s current income and ability to pay.
Midwest Newsroom’s Steve Vockrodt and KCUR’s Laura Ziegler contributed reporting for this story.