Millions of Americans are resorting to risky ways to buy an affordable home
Five years ago, Donald Strayer thought he'd bought a dream home for his extended family. It was on a pretty spot in Ohio's Appalachian mountain foothills, 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 disability. Instead of a regular mortgage, he signed what's 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 dad died, "the only thing I had in the whole world."
For years he made monthly payments of $350 on his new home. And then "one day the sheriff just showed up," he says. "It was foreclosed and they wanted to take my property."
It turned out the seller's family — to whom Strayer had been sending his payments — was keeping the money instead of paying down the mortgage. That left Strayer out a major investment, with no equity and no legal right to the property.
Land contracts and other kinds of alternative financing have been around 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 have skyrocketed. They may be the only option for some, but these alternative deals pose a financial risk to families with the least to lose.
"For many American families, homeownership has been the largest source of wealth over the past century," says Tara Roche with The Pew Charitable Trusts. "Mortgages are a key step to 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 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 arrangements. The 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 deals are usually not recorded with any government office. They don't start with a bank or mortgage company, and so are not subject to the same state or federal regulations.
"In most of our cases, we have handwritten notes that wouldn't pass muster," says Peggy Lee, an attorney with Southeastern Ohio Legal Services. She says some of her clients have even been duped into thinking a verbal contract was binding, though they're not recognized in Ohio.
This leaves borrowers with higher costs and fewer protections. They can be suddenly evicted without a right to a normal foreclosure process. They're shut out of tax and other homeowner benefits. The legal ambiguity prevented many from being eligible for COVID-19 financial relief or the moratorium on evictions, creating a double whammy for families most 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.
In 2014, Marisela Orozco signed a contract to buy a house from the co-worker of a friend in Kansas City, Missouri, for $22,000. At the time she didn't have authorization to live in the United States, spoke little English, and did not understand how property titles worked.
The house was in rough shape, Orozco told member station KCUR and the Midwest Newsroom, which investigated the high prevalence of these arrangements in the region.
"Walls not done. Little bit of the bathroom finished. No good plumbing," she said. "But I say, 'OK,' we fix it up'. And I move 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 the title to the house.
Repeat offenders engage in "profit-driven 'churning'"
Legal aid attorneys say they've seen more alternative financing since the 2008 subprime mortgage crisis, when millions lost their homes to foreclosure. Large investors bought the houses in bulk, many of them in disrepair and in economically struggling areas, then marketed alternative financing schemes to resell them.
Several state attorneys general have filed suits alleging deceptive practices. Pennsylvania recently won a partial victory when a judge ordered that 285 homes be immediately deeded to people who'd signed alternative leasing arrangements.
Some experts worry about the possibility of another spike coming out of the pandemic, as mortgage bailouts and moratoriums expire and foreclosures start to rise.
In rural Ohio, attorney Lee says given the severe housing crunch, a dilapidated home may be the only one some people can afford. But she finds it distressing to see clients invest thousands fixing up a place, believing it will pay off, when the seller never actually intends to turn it over.
"They just want to shift the burden of making repairs by letting them think they're going to build some sort of equity in the home," she says. "And then, oops, the first time something goes wrong... they're in eviction court."
The Pew survey finds a lot of repeat offenders, calling it "profit-driven 'churning'" when an owner initiates the sale of the same house over and over.
States are starting to consider more protections for borrowers
Since it's hard to track alternative financing arrangements, there's 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 policymakers, who are considering policies for alternative home financing borrowers."
Some states have been trying to better protect consumers, and Roche is seeing an uptick this year in proposed legislation.
Sarah Mancini, with the National Consumer Law Center, would like to at least ensure a house is habitable, the same protection a renter would have. And in case of problems, she says there should be a process more akin to foreclosure, so tenants aren't at risk of sudden eviction.
Beyond that, Mancini would like to see traditional, smaller mortgages more available, and not as difficult to get approved.
"We know there's a racial wealth gap. We know that individuals of color 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 requiring an "unreasonably high credit score," she says lenders should look at someone's current income and ability to pay.
Steve Vockrodt of the Midwest Newsroom and Laura Ziegler of KCUR contributed reporting to this story. [Copyright 2022 NPR]