Meet Your New Neighborhood Loan Sharks
Mike Gallagher double-checks the address on his smartphone and walks up the cement steps of the brick two-story house on Detroit’s west side. He rings the doorbell, and after waiting a minute knocks loudly on the door. A dog barks and a shirtless black man in his mid-thirties cracks open the door.
“Good afternoon. I’m Mike from the Home Savers group. We’re talking to people who have a land contract from Harbour Portfolio. Is that your situation?”
“Yes,” says the man, whom the visitor may have just woken up. He cautiously looks at Mike, who is white with unruly short white hair.
“A lot of people are finding these rent-to-buy loans may not be such a good deal. Sometimes they’re worse than being a tenant, since you have to pay for all repairs and maintenance. But you don’t build any wealth until you make the last payment. How long is your contract loan?”
Gallagher learns the man’s name is Antoine and that he paid $30,000 for a house that Harbour Portfolio bought for about $6,000. Antoine has paid $410 a month for four years. He works a night-shift job and has struggled to make the payments.
“If you miss a payment, all this money you are putting into the house will be lost,” Gallagher cautions. “They can evict you, without the protections a homeowner often has.”
Gallagher invites Antoine to an organizing meeting on Monday night. “You could meet other neighbors who have these contract-for-deed situations and learn how to protect yourself.”
“Jeez,” says Antoine, shaking his head. He is fully awake and is smiling now. “Yeah, I could stop by on my way before heading to work.” He takes down the information about the meeting.
They say goodbye and Gallagher enters information into the app on his phone. He heads on to the next house, this one apparently abandoned.
He has seen this before. As a much younger man in the 1970s, Gallagher helped to organize Chicago residents around predatory “contracts for deed.”
“I was one of Jack’s Scouts,” Gallagher explains, referring to Jack Macnamara, a former Jesuit seminarian who helped co-found the Contract Buyers League in Chicago. The scouts were college students and seminarians who knocked on hundreds of doors to jumpstart the league. Between 1967 and 1977, the league worked to stamp out predatory contract practices through organizing and lawsuits.
“By 1977, we thought the plague was gone,” says Gallagher. Until last year. Like a virulent contagion that was thought eliminated, contracts for deed have resurfaced. This time, however, the perpetrators are not “mom and pop speculators,” as Gallagher calls them, but Wall Street private equity firms.
Gallagher is retired now and lives in Boston, after over two decades working for the Service Employees International Union. But one morning in February 2016, Gallagher got a call from Jack Macnamara in Chicago. “Did you see the story?” Macnamara asked, referring to a front-page article in The New York Times, “Market for Fixer-Uppers Traps Low-Income Buyers.”
In that article, investigative reporters Matthew Goldstein and Alexandra Stevenson described the return of contract-for-deed abuses. “Lured by the dream of homeownership, these seller-financed transactions can become a money trap that ends with a quick eviction by the seller, who can flip the home again.”
On that winter morning, 50 years after the founding of the Contract Buyers League, Macnamara told Gallagher it was time to get the band back together. Their work was not done.
Contract for What?
A contract is shorthand for “contract for deed,” also advertised as “rent to buy,” “seller financing,” or “installment land contracts.” These are not inherently predatory, as any northern Midwesterner will tell you. Land contracts are common ways to finance real estate, especially in rural areas without many banks.
In 2009, the last year such data was collected, the U.S. census reported that about 3.5 million people bought their homes through a land contract, more than 4.5 percent of all homeowners. This probably underestimates the number, as many buyers don’t understand the transaction well enough to report it to the census. Most states require that land contracts be recorded, but many sellers do not bother to do so.
Yet the opportunities for abuse are plentiful. Most contracts for deed (CFDs) are not subject to the Truth in Lending Act and other consumer protections that most traditional mortgage borrowers enjoy. Under a CFD arrangement, the buyer has all of the responsibilities and headaches of a homeowner, including repairs and paying property taxes and insurance, without actually owning anything. Yet buyers have fewer rights even than tenants, who can at least call the landlord to fix a busted toilet or broken lock.
“These contracts exist in a regulatory ‘no-man’s land’ between tenant protections and homeowner protections,” says Sarah Mancini, an attorney with the National Consumer Law Center and co-author of a 2016 report about contracts for deed, “Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color.” “These aspiring homeowners have neither,” she says.
Assuming all the risk, if contract buyers miss a payment, they can lose all their previous payments and investments they’ve made in maintaining the house. Because they are technically not owners, buyers may be quickly evicted under forfeiture procedure, without the increased protections of foreclosure law afforded to homeowners. Think “repo” of a car, not a home.
“These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property,” according to Mancini’s “Toxic Transactions” report. In the case of mortgages, in which the buyer becomes a homeowner subject to a lender’s lien, the bank usually requires an appraisal in order to prove a property is not overpriced and provides adequate collateral to secure the loan. And in most jurisdictions, real-estate agents representing sellers are often required to disclose the condition of major systems and advise prospective buyers to get an inspection. (In some states, they must sign a waiver if they chose not to have an inspection.) And after the 2009 mortgage meltdown, homebuyers have gained additional disclosures and protections, thanks to Dodd-Frank financial reforms and the creation of the Consumer Financial Protection Bureau (CFPB).
A home inspection ensures that basic systems are working and that buyers won’t immediately get clobbered with unexpected costs. Usually lawyers for lenders, sellers, and buyers review the agreements to protect their clients. The buyer gets a form summarizing the loan terms and the total cost of the purchase over the life of the mortgage.
Contrast these protections with the experience of Adrian Cortez Hamilton. In January 2015, Hamilton saw a “rent to own” property close to his mother’s house in the West Pullman neighborhood of Chicago. He called the number on the sign, for Vision Property in South Carolina, which informed him the installment contract sale price was $20,000.
Hamilton was given a lockbox combination at the house so he could walk through the property without a seller’s representative. He called back to get the house, putting down a $1,000 initial payment. Paperwork for a 15-year installment contract was sent to him, which he signed and returned. Hamilton had no legal representative on his behalf to review the contract and to ensure that Vision owned the property and that the title was clear of liens.
Shortly after signing the contract, a building inspector showed up at Hamilton’s house telling him the house was condemned and slated for demolition. Hamilton went to Chicago demolition court where he was ordered to pay for repairs. As his contract stipulated, he was now on the hook for repairs in addition to his monthly contract payments. He and his wife scrambled, eventually spending $12,000 to bring the property up to code.
Private Equity Players Resell Foreclosed Properties
Between 2007 and 2011, millions of people lost their homes in the wake of the subprime mortgage scandal. In 2009 alone, more than three million homes went into foreclosure. Hundreds of thousands of these properties eventually became owned by Fannie Mae, a private corporation formerly known as the Federal National Mortgage Corporation.
In 2008, Fannie Mae was placed in conservatorship and given the job of disposing of these vast inventories of foreclosed properties in order to recoup taxpayer funds. Many were sold to homebuyers looking for a “DIY” fixer-upper or to small investors buying up five to twenty units. But Fannie Mae also disposed of thousands of units in bulk sales to Wall Street private equity firms, some with fingerprints leading back to the original subprime mortgage scandal that fueled the meltdown.
The Dallas-based Harbour Portfolio Advisors was the biggest purchaser of properties from Fannie Mae’s bulk sale program. Between 2010 and 2014, they bought more than 6,700 homes mostly in Michigan, Ohio, Illinois, Pennsylvania, Georgia, and Florida. Most of these were sold with contract mortgages and serviced by the South Carolina–based National Asset Advisors. Other Wall Street firms made substantial investments in companies like Battery Point Financial, Apollo Global Management, and the South Carolina–based Vision Property Management.
These private equity funds found CFDs to be a good mechanism to unload properties in poor condition without investing a nickel in repairs. These companies promote seller financing as an alternative path to homeownership in communities without access to traditional credit. Many Rust Belt communities are credit deserts, as banks and mortgage companies are reluctant to lend in some communities or make loans under $50,000. As a result, there has been a surge in contract-for-deed transactions. Contract sales in Minnesota’s Twin Cities increased 50 percent between 2007 and 2013, according to an investigative report by the Star Tribune.
Deploying contracts for deed, sellers receive an income stream from run-down properties that would be unbankable with traditional mortgages and unsuitable for renting because of code violations. In the most predatory scenario, sellers unload dilapidated houses on unsophisticated buyers with a contract for deed, locking them into an inflated purchase price and high interest rate. After paying out tens of thousands for repairs, a defaulting buyer loses all their equity. The contract lender gets back the house in better condition and repeats the cycle.
Stories of wealthy and powerful real-estate interests manipulating newcomers are hardly new. The Jungle, Upton Sinclair’s 1906 novel about the scandalous conditions of Chicago’s meatpacking industry, also depicts the predatory use of a contract-for-deed mortgage. Sinclair’s protagonists, Jurgis and Ona Rudkus, are newlyweds and recent immigrants from Lithuania in search of the American dream. But a shady landlord takes advantage of their limited English skills and signs them up for a contract loan that plunges them into debt servitude, forcing the couple to work 12-hour days in gruesome conditions to survive.
During the Great Migration after World Wars I and II, millions of black families moved from small towns and rural Southern communities to resettle in Northern cities. Unscrupulous real-estate agents “block-busted” stable working-class white neighborhoods, stoking racist fears that black neighbors would lead to declining real-estate values and crime. Snapping up housing at fire sale prices, these real-estate sharks resold homes to black families at inflated prices with contract-for-deed mortgages. Between 1940 and 1970, an estimated 30,000 blacks bought their homes with CFD mortgages in Chicagoland alone.
Beryl Satter, whose father was a white attorney who fought against contract-for-deed loan sharks, estimates that 85 percent of properties sold to blacks during these same years were on contract. Her 2009 book, Family Properties: How the Struggle over Race and Real Estate Transformed Chicago and Urban America, is the definitive history of the Contract Buyers League. “These sales stripped black migrants of their savings during the very years when whites of a similar class background were getting an immense economic boost through FHA-backed mortgages that enabled them to purchase new homes for little money down,” wrote Satter.
Indeed, white homebuyers, thanks to these subsidized federal mortgage loans, got on the express train to middle-class wealth and prosperity. Blacks were not only barred from traditional loans and a seat on the wealth-building train, they were pushed into the predatory loan market where what wealth they built was stripped away.
Getting the Band Back Together
In 1967, Jack Macnamara, a 30-year-old Jesuit seminarian, moved to Chicago to work with Monsignor Jack Egan, a legendary social action priest who had marched with Dr. Martin Luther King Jr. in Selma and worked alongside Saul Alinsky as a board member of the Industrial Areas Foundation. Egan was serving the Presentation Church in Chicago’s Lawndale neighborhood, a predominantly black community. Egan enlisted Macnamara to recruit seminarians and college students to knock on doors and build a community organization block by block. These young men became known as “Jack’s Scouts.”
Some, like Peter Cassady, Jim Devanney, and Mark Splain, were graduates of St. Xavier High School in Cincinnati, where Macnamara had taught Latin and Greek and encouraged social action. Others were students at Catholic colleges looking to get college credit for a year of community organizing. One recruit was Mike Gallagher, 21, who had recently graduated from Holy Cross and moved to Chicago to work full-time for the cause. Gallagher joined the team and spent hours a week in the mind-numbing activity of looking up property deeds.
Between 1967 and 1969, these seminarians and students knocked on hundreds of doors. “None of us knew anything about contract arrangements,” says Macnamara. “But our approach to community organizing was to knock on doors and listen to the concerns people had.” One recurring theme they heard from residents was about high monthly house payments—much higher than mortgages in white neighborhoods—and an unusual lease contract arrangement.
The goal of the organizing was to build “indigenous leaders” from Lawndale. These young white male organizers understood it was not their role to lead this effort, but to support local leaders. It didn’t take long before Lawndale community residents Clyde Ross, Henrietta Banks, Charlie Baker, and Ruth Wells stepped forward to found the Contract Buyers League (CBL) and direct its strategies and tactics, including picketing the sellers’ real-estate offices twice a week.
“Initially some families were hesitant to share how they had been snookered,” recalls Macnamara. But local leaders quickly brought their neighbors together in larger meetings to build an organization and make a plan. By 1969, the CBL had grown to more than 1,000 families on Chicago’s West and South Sides. They enlisted pro bono help from several law firms to file a federal lawsuit, and fought evictions by moving furniture back into houses after the sheriff had moved families out.
At one point, Macnamara mapped a four-block area where 20 families had contracts for deed. He estimated that each of these black families from Lawndale were paying $20,000 more to acquire a home than white families because of both inflated sale prices and higher interest costs. And many black families were evicted when they missed a payment and were stripped of their wealth.
One of CBL’s most effective tactics was a payment-withholding strategy. More than 500 families put funds in escrow to pressure the sellers to renegotiate the terms of the contracts. Each month, buyers would make out money orders to themselves for the amount of their monthly contract payment, and would bring them to the CBL office to be put in a safe deposit box. Because these local real-estate sharks had incurred debts to purchase these properties, they felt the pressure and came to the negotiating table. More than 450 contracts were renegotiated, with an average principal reduction of $13,500, about $97,000 in today’s dollars.
“Many years later, I got obsessed with how much money was stolen from Chicago’s African American community,” says Macnamara, who created an Excel spreadsheet and worked from data he collected from CBL records. “I calculated about $500 million based on inflated sale prices and abusive interest rates”—more than $3 billion in private wealth in today’s dollars. “It was a tax on being African American.”
“This was the result of government policy,” Macnamara adds. “Because blacks were excluded from FHA housing programs, families were pushed into these predatory lending situations.”
Motor City Is Ground Zero
Jack Macnamara did get the band back together. On December 1, 2016, a group of alumni from the Contract Buyers League met in Chicago to assess the situation. They created a database of property transactions involving some of the bigger Wall Street firms.
“We felt we needed to get into the field again,” says Mike Gallagher, who attended the meeting. “We wanted to talk to people and listen.” In April 2017, a segment of the group met up in Pittsburgh, Youngstown, and Akron to knock on doors of people they knew had contract arrangements.
In May, the ad hoc group calling themselves “Home Savers” reconvened in Detroit around a large wooden conference table at the United Auto Workers Local 600 offices. The UAW office sits across from the sprawling River Rouge Ford plant in Dearborn, surrounded by halal meat markets. On the wall is a portrait of John F. Kennedy and historical photos from 80 years of labor organizing, including the 1937 “Battle of the Overpass,” when Walter Reuther and other striking workers were beaten by thugs.
Over five days, the UAW office has served as a meeting place to orient volunteers before being dispatched for an afternoon and evening of door-knocking. Joining Jim Devanney and Mike Gallagher is veteran organizer Wade Rathke, who founded ACORN in 1970, and his daughter, Dine’ Butler, who adapted a smartphone app to enable canvassers to track properties and track data. “From what we can tell, Detroit appears to be ground zero for contract-for-deed abuse,” Gallagher tells me.
“There were more land contracts recorded in Detroit than conventional mortgages,” observes Rathke, citing Wayne County data showing 834 land contracts and 710 mortgages filed in 2016. This number greatly underestimates land contracts because there is no law requiring them to be filed with county officials.
The Home Savers team has spent several weeks combing through online data from the Wayne County Assessor’s Office, looking for properties convened by Harbour Portfolio, Vision Property, and a local group, Detroit Property Exchange. They now have addresses for 250 homes in Detroit and 250 homes in surrounding cities, including Inkster and Taylor.
Stopping the Next Wave of Predatory Practices
“This trend of Wall Street investors backing predatory contract-for-deed transactions reminds me of the subprime lending boom that led to the mortgage crisis,” says attorney Sarah Mancini. Mancini splits her time between the National Consumer Law Center and Atlanta Legal Aid, mostly assisting homeowners facing foreclosure.
As the first news accounts of contracts for deed surfaced in February 2016, Mancini started to get calls at her Atlanta office. “People had these contracts and didn’t understand what they had signed. We started to look into it and realized it is a huge and growing problem.”
“These contracts are the next wave of abuses motivated by corporate profits,” says Mancini, who started practicing law in 2007 and sees the parallels. “They are exploiting the same communities of color that were devastated by the subprime crisis. This is just the latest predatory product.”
To deal with the unfairness of these transactions, state laws should ensure that until buyers have all the rights of homeownership, they at least have the protections provided to tenants. The National Consumer Law Center has suggested a number of public policies that states could implement to stem the tide. One reform would be to require sellers using a land contract to stop pushing provisions that require buyers to make repairs in order to make the house habitable. “It is fundamentally unfair,” says Mancini, “to force a buyer who doesn’t even have a deed to risk being saddled with expensive repairs.”
This intervention, in Mancini’s opinion, would eliminate one of the driving forces for Wall Street firms pushing land contracts—the ability to manipulate low-income buyers into providing an income stream to investors while shouldering all the burdens of home repairs.
Lawmakers in Michigan are exploring a law requiring sellers to get an inspection and a certificate of occupancy to prevent an uninhabitable house being sold through a contract for deed. And the Illinois Senate passed a law aimed at regulating land contracts and requiring greater protections for buyers.
In April, the city of Cincinnati began cracking down on contracts for deed, filing a lawsuit against Harbour Portfolio for unpaid fines and violations and “predatory and unconscionable” contracts. The lawsuit alleges that Harbour “intentionally fails to disclose known defects about properties, including building code order and other violations.” When contracts fall through, the lawsuit alleges that Harbour “churns the property through the process anew.” Cincinnati is attempting to prevent Harbour from selling additional homes until the firm remedies outstanding violations.
The national Consumer Financial Protection Bureau (CFPB) cannot change state property laws, but it could issue regulations requiring contract-for-deed transactions to abide by consumer protection laws against deceptive practices.
In May 2016, six members of Congress, led by Connecticut Senator Richard Blumenthal, wrote to CFPB director Richard Cordray: “Because CFDs can lead to increased debt, financial instability, and eviction for hard-working American Families,” they urged the CFPB to “examine the use of CFDs and determine how the Bureau may provide consumer protections to cover these transactions.” Shortly after this request, the CFPB began investigating Harbour and, in February, a federal judge ordered Harbour to comply with the bureau’s subpoena for documents.
Federal lawmakers have also called on the Federal Housing Finance Agency to stop Fannie Mae and Freddie Mac, the two mortgage-finance companies in federal conservatorship, from selling foreclosed homes to firms such as Vision Property and Harbour Portfolio that are engaged in predatory contract-for-deed mortgage practices. On May 23, Fannie Mae announced it had terminated sales to Vision Property after reviewing the firm’s rent-to-own program.
Democratic Representative Elijah E. Cummings of Maryland, who sits on the Oversight and Government Reform Committee, wrote to Vision Property CEO Alex Szkaradek, raising “grave concerns about the physical and financial well-being of tenants” with Vision leases. A lawyer for Vision said “the letter’s escalated rhetoric does nothing to assist Americans without access to traditional mortgage loans to achieve homeownership, which Vision works to do every day.”
According to the National Consumer Law Center, very few laws have been changed at this point. “I don’t know anyone else who is doing community organizing on this, aside from Jack Macnamara and this group,” says Mancini, referring to the Home Savers retirees.
I JOIN GALLAGHER and another canvasser, retired Teamsters union activist Dave Eckstein. We climb into Eckstein’s blue pickup truck and head to west Detroit with 17 addresses to visit. The first address is a vacant lot, the house recently demolished. The second house is abandoned.
In search of the third house, we drive down West Parkway, a street that has burned-out shells of houses, tall prairie grass, and determined outposts with one or two inhabited homes on each block. At number 15814, we approach the house on foot, unable to positively identify the address because shrubs have grown up in front of the door.
“This is it,” says Gallagher, pointing to the partially obstructed house number. “Look, there is even a sign that says Vision on the window.”
At one house, Lena Smith answers the door. She is a black woman in her forties, and she tells us her story. Smith owned this house in 2014 but fell behind in property taxes, owing $6,000 to the city of Detroit. The city sold the property to Detroit Property Exchange (DPE) for $5,000, which then resold the property back to Smith for $30,000 with a five-year contract for deed. Smith made payments of $500 a month for four years—and then paid off the balloon loan of $7,000, taking title to the deed for a second time.
“Wow,” says Gallagher. “That’s amazing. How did you do that?”
“I prayed a lot,” says Smith, grinning through her Plexiglass door.
“So it was never vacant,” Gallagher replies. “That was lucky. And if you had missed a payment, you would have lost it?”
“Yes,” says Smith, smiling. “I was holding my breath the whole time.”
“So you bought this house twice?” Gallagher asks.
“Yes. But I can’t afford to buy it again,” she says, laughing. “They tried to take it from me but I’m still here.”
The canvassers reconvene at the UAW Hall to compare notes. After knocking on more than 100 doors, they wonder if what they are seeing is a new twist on predatory homeownership or an extension of the overall affordable-housing crisis, at least in Detroit.
“There’s no doubt there is lying, deceit, fraud, and all manner of predatory behavior here,” says Rathke, who also canvassed with the team in Pittsburgh, Akron, and Youngstown. “But increasingly it appears this is a con on desperate renters, people unable to get Section 8 vouchers or get off the waiting lists of public housing. Or their incomes are too unstable for higher rents and they lack access to credit to be able to buy. So they are going for what they can afford, regardless of the condition, because it’s the best they can do, and maybe, like playing the lottery, they might even win something, and get to own the thing.”
This present-day CFD scandal presents an organizing challenge, as the houses are spread across a larger area of the northern Midwest and dispersed throughout communities. On the other hand, the fact that several large Wall Street firms are the perpetrators makes it possible to bring public pressure on regulators and the firms themselves. But how will this work happen?
“We’re not trying to build an organization,” says Mike Gallagher. “We’re too old for that. But like a lot of retirees, we could use some walking-around money, just to be able to buy food for some of our volunteer door-knockers and pay some expenses.” The group is volunteering their time, paying for plane tickets and rental cars out of their own pockets. Most of them slept at a Jesuit residence at University of Detroit High School.
The retirees see their role as doing the R&D phase of a major campaign, trying to test out a grassroots organizing model. “A lot of the community-organizing networks are stretched and not able to do this initial legwork,” says Gallagher. “So we’re doing the first phase of door-knocking and organizing residents to incubate this for someone else. Our hope is we take it to the PICO community-organizing network or People’s Action, with a strong proof of concept and a fundable, winnable campaign.”
You could be doing anything right now, I suggest to the retirees. You could be playing golf or fishing.
“I hate golf,” says Gallagher resolutely. “And I’ve never successfully caught a fish. Listen, you don’t know what retirement is like. You need something to do.”
Yes, but door-knocking in Detroit?
“I’m doing exactly what I want to be doing,” says Macnamara, who turns 80 this year. “These days, I only do the things I am willing to die for. I’d be willing to die for this.”