Contract Selling Is Back, Big-Time

The Chicago Reader quoted me in The Infamous Practice of Contract Selling Is Back in Chicago. It reads, in part,

When Carolyn Smith saw a for sale sign go up on her block one evening in the fall of 2011, it felt serendipitous. The now 68-year-old was anxiously looking for a new place to live. The landlord of her four-unit apartment building in the city’s Austin neighborhood was in foreclosure and had stopped paying the water bill. That month, she and the other tenants had finally scraped together the money themselves to prevent a shutoff and were planning to withhold rent until the landlord paid them back. Exhausted with this process and tired of dealing with “slumlords,” Smith wanted to buy a home in the neighborhood to ensure that she, her mother, Gwendolyn, and their dog, Sugar Baby, would have a stable place to live. But due to a past bankruptcy, Smith thought she would never be able to get a mortgage. So when she saw a house on her street for sale with a sign that said “owner financing,” she was excited. The next morning, she called the number listed and learned that the down payment was just $900—a sum she could fathom paying. “I figured I was blessed,” she says.

Her good fortune continued. A man on the other end of the line told her she was the very first one to inquire. The seller, South Carolina-based National Asset Advisors, called her several more times and mailed her paperwork to sign. Smith says she never met in person with anyone from National Asset Advisors or Harbour Portfolio Advisors, the Texas-based company that owned the home. But she says the agents she spoke with assured her that her credit was good enough for the transaction, despite the past bankruptcy. Next, they gave her a key code that allowed her to go in and look at the house, explaining that she’d be purchasing it “as is.” Smith thought the two-flat looked like a fixer-upper—the door had been damaged in an apparent break-in, and there was no hot-water heater, furnace, or kitchen sink—but given her poor luck with apartments of late, she felt she couldn’t pass up the chance to own a home. Both she and her mother, now 84, had been renting their whole lives; after pulling together the down payment, they beamed with pride when, in December 2011, they received a letter from National Asset Advisors that read “Congratulations on your purchase of your new home!”

But within a year, Smith discovered that the house was in even worse shape than she’d realized. In her first months in her new home, Smith estimates that she spent more than $4,000 just to get the heat and running water working properly, drinking bottled water in the meantime. Then the chimney started to crumble. Smith would hear the periodic thud of stray bricks tumbling into the alleyway as she sat in her living room or lay in bed at night; she began to worry that a passerby would be hit in the head and soon spent another $2,000 to replace the chimney. Public records show that the house had sat vacant earlier that year, and the city had ordered its previous owners to make extensive repairs.

Had Smith approached a bank for a mortgage, she likely would’ve received a Federal Housing Administration-issued form advising her to get a home inspection before buying. But as far as she recalls, no one she spoke to ever suggested one, and in her rush to get out of her old apartment, she didn’t think to insist.

The documents Smith signed with Harbour and National Asset Advisors required her to bring the property into habitable condition within four months, and with all the unexpected expenses, she soon fell behind on her monthly payments of $545.

Smith’s retirement from her job as an adult educator at Malcolm X College, in the spring of 2013, compounded the financial strain. Living on a fixed income of what she estimates was around $1,100 a month in pension and social security payments, she fell further behind, and the stress mounted.

“When we got to be two months behind, they would call me every day,” she remembers.

National Asset Advisors also began sending her letters threatening to evict her. That’s when Smith had a heart-stopping realization: She hadn’t actually purchased her home at all. The document she had signed wasn’t a traditional mortgage, as she had believed, but a “contract for deed”—a type of seller-financed transaction under which buyers lack any equity in the property until they’ve paid for it in full. Since Smith didn’t actually have a deed to the house, or any of the rights typically afforded home owners, she and her mother could be thrown out without a foreclosure process, forfeiting the thousands of dollars they’d already spent to rehabilitate the home.

“I know people always say ‘buyer beware’ ” she acknowledges. “But I’d never had a mortgage before, and I feel like they took advantage of that.”

What felt like a private nightmare for Smith has been playing out nationwide in the wake of the housing market crash, as investment firms step in to fill a void left by banks, now focused on lending to wealthier borrowers with spotless credit histories. In a tight credit market, companies like Harbour, which has purchased roughly 7,000 homes nationwide since 2010, including at least 42 in Cook County, purport to offer another shot at home ownership for those who can’t get mortgages. Such practices are increasingly common in struggling cities hard hit by the housing crash. A February 2016 article in the New York Times titled “Market for Fixer-Uppers Traps Low-Income Buyers” examined Harbour’s contract-for-deed sales in Akron, Ohio, and Battle Creek, Michigan. The Detroit News has reported that in 2015 the number of homes sold through contract-for-deed agreements in the city exceeded those sold through traditional mortgages.

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Contract-for-deed sales also offered an attractive loophole from the growing set of regulations on traditional mortgages following the financial crisis. “In the same way that you saw [subprime lenders like] Countrywide get really big in the late 1990s,” says David Reiss, research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, “one of the real attractions for the businesses operating in this space is that they are underregulated.”

Compact Units: Mountain or Molehill?

NYU’s Furman Center has posted a short Research Brief, Compact Units:  Demand and Challenges. The brief notes that there is no formal definition of a compact or micro unit of housing, but

the term is typically used to refer to units that contain their own bathroom and a kitchen or kitchenette, but are significantly smaller than the standard studio apartment in a given city. Accessory dwelling units (ADUs) are self-contained units located on the property of a single-family home. Sometimes ADUs are separate structures, like a cottage on the same lot as a primary dwelling; sometimes they are attached to the primary structure, located in a basement, in an extension, or over a garage.

Proponents of compact units argue that they allow seniors to live independently, respond to changing household sizes and demographics, reduce sprawl through urban infill, mitigate the environmental effects of larger developments by reducing energy consumption, free up larger units for families, and help cities provide housing affordable to a wider range of households. (2)

The brief is a very useful overview of the debate concerning compact units but my own take is that they represent a mere molehill of possibility when it comes to affordable housing. No new construction in cities, unless heavily subsidized, is geared toward low-income households and probably only a small portion of such new construction is geared to moderate-income households. The economics of new construction just don’t allow it.

This is not to say that New York City shouldn’t change its larger-than-average minimum unit size regulations (400 square feet) so that they are in line with those of other cities (220 square feet). These small units could work well for all sorts of one-person households, which, by the way, make up more than half of all households in NYC. They just wouldn’t be low-income households. But, by expanding the total number of units available, they can put at least some downward pressure on rents.

My bottom line: compact units are good, but they will not provide the mountain of affordable housing that some claim they can.

Mortgage Sustainability Tool Launched

Freddie Mac has created a useful new tool, the Multi-Indicator Market Index(SM) (MiMi(SM)).The press release states that it is

a new publicly-accessible tool that monitors and measures the stability of the nation’s housing market, as well as the housing markets of all 50 states, the District of Columbia, and the top 50 metro markets.

MiMi combines proprietary Freddie Mac data with current local market data to calculate a range of equilibrium for each single-family housing market covered. Monthly, MiMi uses this data to show, at a glance, where each market stands relative to its own stable range. MiMi also indicates how each market is trending — whether it is moving closer to, or further away from, its stable range. A market can fall outside its stable range by being too weak to generate enough demand for a well-balanced housing market or by overheating to an unsustainable level of activity.

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In today’s first release of MiMi, several key findings emerged that highlight the current state of the nation’s housing market as of January 2014:

  • The national MiMi value stands at -3.08 points indicating a weak housing market overall. From December to January the national MiMi improved by 0.03 points and by 0.81 points from one year ago. The nation’s housing market is improving based on its 3-month trend of +0.17 points and moving closer to its stable and in range status. The nation’s all-time MiMi low of -4.49 was in November 2010 when the housing market was at its weakest.
  • Eleven of the 50 states plus the District of Columbia are stable and in range with North Dakota, the District of Columbia, Wyoming, Alaska, and Louisiana ranking in the top five.
  • Four of the 50 metros are stable and in range, San Antonio, Houston, Austin and New Orleans.
  • The five most improving states from December to January were Florida (+0.11), Tennessee (+0.11), Michigan (+0.09), Louisiana (+0.07), Nevada (+0.07), and Texas (+0.07). From one year ago the most improving states were Florida (+2.12), Nevada (+1.84), California (+1.26), Texas (+1.06) and D.C. (+1.05).
  • The five most improving metros were Miami (+0.11), Detroit (+0.10), Orlando (+0.09), San Antonio (+0.09), and Chicago (+0.08). From one year ago the most improving metros were Miami (+2.54), Orlando (+2.08), Riverside (+1.87), Las Vegas (+1.81), and Tampa (+1.77).
  • Overall, in January of 2014, 25 of the 50 states plus the District of Columbia are improving based on their 3-month trend and 35 of the 50 metros are improving.