Portside

This article appears in the Summer 2017 issue of The American Prospect magazine. Subscribe here. 

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?”

“Thirty years.”

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.

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.

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.

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.

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.

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