The Racist Roots of a Way to Sell Homes - The New York Times

"From the 1930s through the 1960s, most African-Americans could not get mortgages because the government had deemed neighborhoods where they lived ineligible for federal mortgage insurance, the Depression-era innovation that made mortgages widely affordable.



The situation exposed black families to hucksters who peddled homeownership through contracts for deed, in which a home seller gives a buyer a high-interest loan, coupled with a pledge to turn over the deed after 20 to 40 years of monthly installment payments. These contracts enriched the sellers by draining the buyers, who built no equity and were often evicted for minor or alleged infractions, at which point the owner would enter into a contract with another buyer. In the process, families and neighborhoods were ruined.



Contracts for deed are making a comeback. They are increasingly being used by investment firms that have bought thousands of foreclosed homes and want to sell them to lower-income buyers “as is,” according to a recent report in The Times by Alexandra Stevenson and Matthew Goldstein. Many of the homes are in Alabama, Georgia, Michigan, Missouri and Ohio. In one example in the article, investors who bought foreclosed homes at an average price of $8,000 issued a contract on one in Ohio in 2011 for $36,300 at 10 percent interest.



Contracts for deed make gouging possible, because unlike traditional mortgages, there is no appraisal or inspection to ensure that the loan amount is reasonable. They also let an investor swiftly evict buyers for missed payments, rather than giving them time to catch up, as required under a mortgage. And they usually require the buyer to pay hefty upfront fees. Unlike a rental security deposit, however, the fee is almost never refundable.



Contracts for deed are similar in some ways to the subprime lending that contributed to the housing bust in this century. Investors in the contracts include some of the Wall Street players who inflated the mortgage bubble, including Daniel Sparks, the former Goldman Sachs executive, whose department was betting on a crash in 2007 even as the bank was selling toxic mortgage securities. The stated rationale for contracts for deed is that low-income buyers cannot qualify for mortgages — the same line that was used to justify subprime lending.



What became evident from the crash was that many subprime borrowers who were wiped out — and who were disproportionately black and Hispanic — could have qualified for better terms and were misled.



Even for buyers truly unable to get mortgages, contracts for deed nearly always inflict harm. The exception is a few programs where public agencies or nonprofits use interest-free contracts to sell homes to needy families and then help them refinance into traditional mortgages. Federal housing agencies could foster that approach by selling more of their foreclosed properties to nonprofits."



The Racist Roots of a Way to Sell Homes - The New York Times