Five years ago, Donald Strayer thought he had bought a dream home for his extended family. It was a beautiful place at the foot of the mountains of Ohio in the Appalachians, with room for him and his wife, his daughter’s family plus 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’s because of hospital bills years ago. The 58-year-old former forklift driver has a chronic lung disease and lives off a disability. Instead of a regular mortgage, he signed what is known as 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 one I had in the whole world.”
For years, he paid monthly payments of $ 350 on his new home. And then “one day the sheriff just showed up,” he says. “It was foreclosed on and they wanted to take my property.”
It turned out that the seller’s family – to whom Strayer had sent his payments – kept the money instead of paying down the mortgage. That left Strayer a major investment with no equity and no legal right to the property.
Land contracts and other forms of alternative financing have been around for a long time, with roots in the race-based redlining that blocked black Americans from traditional mortgages. But legal aid experts say they became more common after the Great Recession, and as housing and rental costs rose. They may be the only option for some, but these alternative agreements pose a financial risk to families with the least to lose.
“For many American families, home ownership has been the largest source of wealth in the last century,” said Tara Roche of The Pew Charitable Trusts. “Real loans are an important step in achieving financial security.”
Colored people and people in rural areas are more likely to use these risky events
A first of its kind national survey conducted by The Pew Charitable Trusts shows that 36 million Americans – about 20% of all borrowers – have used alternative ways to finance a home at some point, including 7 million currently in such schemes . Borrowers are largely low-income, more likely to live in rural areas and disproportionately Hispanic and black, reflecting the racial divide in home ownership.
Unlike mortgages, alternative financing agreements are not usually registered with any government offices. They do not start with a bank or a mortgage company, and are therefore not subject to the same state or federal rules.
“In most of our cases, we have handwritten notes that would not pass,” said Peggy Lee, a lawyer at Southeastern Ohio Legal Services. She says some of her clients have even been tricked into believing that a verbal contract was binding, even though they are not recognized in Ohio.
This leaves borrowers with higher costs and fewer protections. They can suddenly be thrown out without the right to a normal foreclosure process. They are excluded from tax and other homeowner benefits. The legal ambiguity prevented many from being eligible for COVID-19 financial relief or the moratorium on deferrals, creating a double breath for families likely to suffer during the pandemic.
Another crucial distinction: usually the seller maintains the property deed until the last payment, yet 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 colleague of a friend in Kansas City, Missouri, for $ 22,000. At the time, she was not allowed to live in the United States, spoke little English and did not understand how property titles worked.
The house was in hard shape, Orozco told member state KCUR and the Midwest Newsroom, which investigated the high prevalence of these events in the region.
“The walls are not finished. A little bit of the bathroom finished. No good plumbing,” she said. “But I say, ‘OK,’ we’ll fix it. ‘
But after 44 months of regular payments and more than $ 10,000 in home improvements, the owner disappeared and never gave Orozco the property for the house.
Repeated offenders engage in “profit-driven ‘churning'”
Legal aid lawyers say they have seen more alternative financing since the crisis with subprime loans in 2008, when millions lost their homes due to foreclosure. Large investors bought the houses in bulk, many of them in maturity and in economically difficult areas, and then marketed alternative financing schemes to resell them.
Several state attorneys have filed lawsuits alleging misleading practice. Pennsylvania recently won a partial victory when a judge ordered that 285 homes be immediately deeded to people who had signed alternative leases.
Some experts are concerned about the possibility of another rise coming out of the pandemic as mortgage lending and moratoriums expire and foreclosures begin to rise.
In rural Ohio, lawyer Lee says given the severe housing crisis, a dilapidated home may be the only thing some people can afford. But she finds it disturbing to see that customers are investing thousands in fixing a place, in the belief that it will pay off when the seller actually never intends to turn it around.
“They just want to shift the burden of making repairs by making them think they want to build some kind of equity in the home,” she says. “And then, oops, the first time something goes wrong … they’re in adjournment.”
The Pew survey finds a lot of repeat offenders, calling it “profit-driven ‘churning'” when an owner starts selling the same house over and over again.
States are beginning to consider more protection for borrowers
As it is difficult to track alternative funding schemes, there has been a lack of data on who uses them, where they live and what their experiences are. Pew’s Roche hopes the information in the survey “can help inform politicians who are considering policies for alternative borrowers to finance housing.”
Some states have tried to better protect consumers, and Roche is experiencing an increase this year in proposed legislation.
Sarah Mancini, with the National Consumer Law Center, would like to at least ensure that a house is habitable, the same protection that a tenant would have. And in case of problems, she says there should be a process that is more like foreclosure so tenants do not risk being evicted suddenly.
Beyond that, Mancini would like to see traditional, smaller mortgages more accessible and not that hard to get approved.
“We know there is a racial wealth gap. We know that colored individuals are more likely to have experienced a bump in the road at some point that may have caused a payment default,” she says.
Instead of demanding an “unreasonably high credit score,” she says, lenders should look at a person’s current income and ability to pay.
Steve Vockrodt from Midwest Newsroom and Laura Ziegler from KCUR contributed reporting to this story.