Friday Feb 24

Contract Buying Has A Past But Shouldn’t Have A Future!

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Not too long ago, I was sitting in the waiting room while my car was being serviced. I noticed that a woman, who was also waiting for her car, was reading a book. I could not resist the temptation to talk with her. “What do you think of it so far?” I asked. “After reading it for a while,” she replied, “I have to put it down and calm down because it keeps making me so mad,” I could easily relate to the woman’s response. The book we were both so angered by was Family Properties: How the Struggle Over Race and Real Estate transformed Chicago and Urban America by Beryl Satter. For my part, the book made me angry twice – once for what happened in the past and again for what is happening all over again and on a bigger scale today.

Then

I know too well what the book describes in heart-wrenching detail. The confluence of public policy and private greed – a perfect storm — wreaked havoc on the Chicago’s Lawndale neighborhood and other neighborhoods on the west and South Side during the period between 1940 and 1970.

Here is how it worked: The second Great Migration was constantly creating demand for housing on the part of African American families who were moving up from the South. Real estate speculators took advantage of the opportunity to scare the white homeowners in what had been a stable working class neighborhood into panic selling. This “blockbusting” used many different sleazy tactics – but perhaps the most effective was the most direct — namely sending agents out to knock on doors with the warning that the blacks are coming and you had better sell now. The speculators were able to buy up properties for cheap, obtain mortgage financing for their purchases, and turn around and sell to black families on installment contracts at twice or more their purchase price.

Under the contract, the buyer put down a hefty down payment and committed to pay monthly installments for 20 years or more. The buyer was responsible for property taxes and maintenance, but did not receive the deed or title to the house until the final payment was made. Under a contract for deed the buyer has all of the responsibilities of a homeowner (without actually owning anything) and less that the rights of a tenant (who can call the landlord when the toilet is busted). The family built no equity along the way.

Families and whole communities were up against more than just a few rapacious real estate sharks. The federal government was pushing this wave of destruction right through the neighborhoods, especially the Federal Housing Authority (FHA) who withdrew loan guarantees in racially changing areas and left the buyers of color without access to conventional financing and therefore prey to the contract for deed scheme. This sort of government sanctioned “redlining” allowed mortgage companies to refuse loan applications, even those from solidly credit worthy black working class families, in certain defined geographies in Chicago and all over the country. The result: turnover, struggle to make payments, evictions, declining property values, and inability to accumulate wealth through equity.

In the meantime, the buyer was subject to quick eviction for missing a single payment. Many families who failed to make timely payments were in fact tossed out on the street, leaving behind their down payment and whatever money they had put into the property in repairs, sweat equity and monthly payments, and leaving the seller to start the process all over again with a new family.

To respond working with neighborhood leaders like Clyde Ross, and young, often student volunteers, we organized Chicago’s Contract Buyers League in the late sixties and early seventies. Over 30,000 Chicago black families bought homes in this way between 1940 and 1970 until the FHA changed their policies and our organizing focused on these purchases as the predatory outrages that they were. As a young Jesuit seminarian in 1967, I worked out of the Presentation Catholic parish in Lawndale then under legendary pastor Monsignor Jack Egan. When we started we only knew that we wanted to get out and talk to neighborhood residents and listen to their concerns. Early on those of us who were part of the project began hearing about this strange contract buying thing. Through direct conversations, small group meetings, research into the precise predatory terms of the sales and into the sellers (who held properties under Illinois arcane blind trust system), we were able to begin to piece together what was going on. In time, we were able to bring contract buyers together in larger meetings, and (after some initial shamefaced hesitancy to share with others how you had been snookered), to build an organization and make a plan.

In time the Contract Buyers League grew to include almost 1000 families on the West Side (older homes) and the South Side (new construction) who were fighting together to re-negotiate the deal. We met every Wednesday night. We picketed the sellers’ real estate offices on Saturdays. We fought against evictions by the sheriff’s department, moving the furniture and belongings of families who lives had been scattered on the front lawn back into their houses to fight another day. And, perhaps most effectively, withheld and placed in an escrow account monthly payments under the contract. All of this activity produced some positive results as hundreds of families were able to negotiate with their sellers and convert the loans to conventional financing. The majority, however, were not. On behalf of these families still trapped in unfavorable installment contracts the organization filed a federal lawsuit. The lawsuit eventually failed because judges and jurors and the general public did not understand the complexities of land purchases or contract buying. By my own estimate the CBL families were cheated out of $500,000 between inflated prices and abusive terms, which I call a “race” tax. In any event, the exact conditions that had created the contract selling phenomenon came to a virtual halt by the mid -1970’s and the practice appeared to have died out.

Now

Or so we thought, but contract-for-deed purchases are back! We should have known that the contract selling scam would come back. Low and moderate income families without access to credit have been ripped off through various scams forever. Upton Sinclair documented these stories in his famous muckraking investigation in The Jungle in 1906 every bit as much as Beryl Satter did in 2009 writing about the real estate speculation that ghettoized communities in Chicago in the middle years of the of the 20th century. Nonetheless, that doesn’t make it any easier to take lying down.

Fast forward fifty years: In the wake of the 2007-08 foreclosure crisis (also brought about by unchecked predatory lending practices) millions of families were driven from their homes. Banks were resistant, despite repeated demands, to rewrite outstanding loans, preferring to simply foreclose and close the books on the dreams of hardworking people trapped in bad subprime loans. Many of the foreclosed properties ended up eventually with the quasi-public guarantor of last resort FNMA, the Federal National Mortgage Association. And, to clear its own books and move on, Fannie in recent years has been unloading its vast inventory often at rock bottom, fire sale prices.

Judging from a preliminary examination of a recently obtained listing of 153,000 forecloses in Michigan, Illinois and Ohio the great majority of sales were to individual buyers who were perhaps looking for a fixer-upper for their own occupancy (or to flip in DIY sort of way). Many were sold off in small lots of 5-20 to local real estate or construction companies who were no doubt bargain hunting in specific cities or suburbs. But another bunch were sold in big blocks to Wall Street connected private equity firms like Dallas-based Harbour Portfolio, Apollo Global, and Blackstone Group. One company is headed by a guy from Goldman Sachs who played a significant part in bringing about the foreclosure mess in the first place. Often the funding to finance this massive buying spree has come from institutional investors such as university endowments and public sector pension funds

In many instances, these big guys are turning to contract for deed as the debt instrument for disposing of the houses they acquired in distressed communities like Detroit, Flint, Akron, and, yes even Lawndale again. With far more stringent qualifying standards since the crisis, mortgage lenders (who never liked making small loans of under $50,000 anyway) have retreated altogether from these markets. Again, that leaves potential buyers who cannot obtain a decent conventional loan with few options other than contract for deed.

The following situations surrounding today’s contracts for deed and used during the Second Great Migration are significantly different.

• The investors during the Second Great Migration were generally mom-and-pop businesses. Today’s investors are wealthy Wall Street veterans and/or Wall Street types with large dollar amounts to invest.

• During the Second Great Migration, most if not all the houses on a particular block or in a particular neighborhood, largely African American neighborhoods, were sold using contracts for deed. Today, houses being sold using contracts for deed are generally more spread out because they are houses that have been subjects of foreclosures and even though African Americans were victims of more foreclosures they are not as densely located as during the Second Great Migration.

• During the Second Great Migration, a payment strike was a successful strategy that resulted in significant contract renegotiations. That strategy may not to be as effective today because the sellers may not need the monthly payments to pay their mortgage payment on the building because today’s sellers do not have mortgages on the contract for deed properties, although they may have lines of credit and be exposed to pressure by withholding still.

Essentially today’s contracts for deed have the same predatory components that contract for deed had during the Second Great Migration. The differences lie in three categories: 1) size and prestige of the investors; 2) contract for deed properties today are spread over a wider territory; 3) success in renegotiating contracts today will require different strategies because of the size and wealth of the investors.

It should be noted that contracts for deed are not bad in themselves but rather they are made onerous by the inclusion of one or more predatory components. The predatory components in today’s contract for deeds have different comparative importance. The presence of one or more of these predatory components is usually sufficient to make the contract for deed predatory or oppressive to a poor homebuyer. The predatory components are as follows:

• Inflated sales price. A way to remedy is to require an appraisal as is required with a traditional mortgage and use the new norms for appraisals required since the sub-prime housing crisis.

• Excessive interest rate.

• Contract buyer is responsible for repairs. A way to remedy is to require an inspection at the time of the sale.

• Buyer has no equity until the final payment is made.

• The forfeiture procedure allows for speedy eviction unlike the process that is required for mortgage foreclosures

• Monthly payment is higher than the buyer can afford. One possible remedy would be to extend the length of the amortization schedule.

• Arbitration clauses that require the contract buyer to settle disputes with an arbitrator chosen by, paid for, and dictated to by the contract seller rather than the courts.

The American legal principle of caveat emptor allows for seller and buyer to be unequal bargainers. Or to look at it another way, those who propose getting rid of regulations imposed on businesses are the same people calling for regulations and restrictions on those who are not members of the privileged class.

I am on the board of a Chicago not-for-profit organization that is in the process of buying the building in which it is housed from another not-for-profit. The price was settled at $160,000. The down payment was agreed upon at $20,000. The seller offered to finance the deal, so a five year, 4% interest loan was also agreed upon. The buyer agreed to accept the cost of fixing the heating unit in a large conference room. The seller’s lawyer prepared for contract for sale. The buyer’s lawyer reviewed the contract and made some adjustments. The contract was then delivered to the four people on the committee. I was one of the committee members, all of whom are college graduates, who received the lawyer-approved contract. The heading read: “Articles of Agreement for Deed.” I became disturbed when I came to the section that provided no equity until the final payment was made. There was also a provision for forfeiture rather than the lengthier process for foreclosure. And there was an arbitration clause. Thus, this contract contained three of the predatory components of a contract for deed. The seller had no problem eliminating these components. But the point to be made here is that these predatory components are so engrained in the legal system as normal and acceptable that even lawyers do not point out the dangers that these provisions embody.

During the Second Great Migration, the federal government was complicit in the oppression of contract buyers because of the policies of the Federal Housing Administration (FHA). Today, the federal government is complicit in the oppression of contract buyers because federal agencies are selling foreclosed properties in large quantities at bargain prices to sophisticated investors without any regard for the people who will be hurt by these investors. The federal Consumer Financial Protection Bureau (CFPB) refuses to place a moratorium on these sales. And CFPB is dragging its feet when it comes to regulating contracts for deed. State laws are a mishmash.

One way or another, this has to end!

Jack Macnamara organized the Contract Buyers’ League in Chicago almost 50 years ago and is now active in the Campaign Buyers’ Campaign trying to root out this predatory practice once and for all.

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