Investigators in New York will probe the resurgence of a dangerous housing finance practice that was historically used to target low-income black families who dreamed of owning their own home, the state’s Department of Financial Services announced Monday.
Investigators have sent subpoenas to at least four separate companies that are helping drive a boom in a long-dormant alternative to a traditional mortgage, the Wall Street Journal reports.
While the mortgage alternative is not inherently illegal, its shady legacy of exploitation has already prompted scrutiny from federal officials this spring.
The tactic is often called “contract for deed” home finance. Under this model, investors purchase homes, often at the minimal prices afforded by foreclosure sales, and then seek out potential “buyers” who do not qualify for a mortgage because they are too poor. They then market a contract to the would-be homeowner under which she agrees to pay a fixed monthly fee for decades, knowing she will not actually get the deed to the place until the contract is fully paid off.
People who take out a mortgage own their homes, and their lenders face many legal hurdles to try to foreclose and obtain the property should the borrower default. People who live in someone else’s house and make contract-for-deed payments, meanwhile, have no such legal protections — and the companies they contract with are free to charge much higher rates than mortgage finance law allows.
Contract-for-deed was rampant in the middle of the 20th century, when non-bank financial interests would often target black families who were “redlined” out of the traditional mortgage markets by specific race-motivated laws. From Flint to Ferguson, redlining helped shape communities that remain epicenters of neglect and institutional racism to this day.
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The result was a two-tiered housing finance system, where white working-class families could get mortgages and enjoy court protection while they repaid the loans and black families were shunted off into another system that was dominated by predatory actors. That bifurcation and the resulting systemic racial injustices were one of the core subjects of Ta-Nehisi Coates’ award-winning 2014 article “The Case For Reparations” in The Atlantic. Black people who bought homes “on contract” never got a chance to build equity, often the primary basis for accumulating family wealth not just in one lifetime but across generations.
Now, decades after such seller-financed home finance systems largely vanished, and less than two years after Coates’ article drew mass attention to its role in propping up ongoing economic and social inequality in America, contract-for-deed sales are back in vogue.
As many as 3 million Americans have bought into the products under investigation, making the market for the alternatives hot enough to attract investment capital from traditional Wall Street powers.
Large investors bought up thousands of foreclosed homes in recent years and then “sold” them through the contracts, as documented by the New York Times. Often, the investors scored the foreclosure units through federal auctions as government agencies sought to rid their own books of underwater homes and reduce risk to taxpayers.
Many such units have been converted into rental properties by Wall Street investors hoping to turn the resulting stream of rent payments into a new version of the housing securities market that effectively allowed well-heeled firms to gamble on the mortgage market prior to the last financial crash.
But many others have reverted into the old-timey contract-for-deed product line, where demand for the risky, no-equity loan alternatives is once again booming.
This time, as the Washington Post’s Emily Badger noted last week, there’s no officially-sanctioned racism walling black people out of the mortgage lender’s office. But there is a large crop of people who cannot get home loans, either because their credit rating tanked during the financial crisis or because banks have adopted stricter lending standards since the bubble burst.
“Choices that black Americans have had for housing loans have been predatory loans, or no loans,” redlining and housing finance historian Beryl Satter told Badger. Satter called the new surge in shady mortgage alternatives “a complete revival of redlining in a slightly different guise.”
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It’s a particularly tragic outcome considering the true nature of the predatory lending that brought on the financial crash. While conservative voices have fought relentlessly to rewrite the narrative of the crash and argue that liberal do-gooders in government forced banks to lend to irresponsible homeowners, the truth is closer to the opposite. Unscrupulous lenders figured out how to game both mortgage finance law and the feckless regulatory infrastructure installed by President George W. Bush and weakened for decades prior by Presidents Reagan, Bush, and Clinton.
In response to the crisis, lawmakers and regulators both clamped down on the worst predatory lending practices. The new rules made it harder for anyone to repeat the herculean deceptions of people like Countrywide CEO Angelo Mozilo, thus making a repeat of the crisis less likely. But they also forced banks to tighten up lending standards across the board — contributing to the pent-up demand for housing that today is fueling a reprise of the separate, unequal housing finance system that ensured black families could not build real wealth throughout the middle decades of the 20th century.