What are Toxic Transactions? Seller-Financed Home Sales

Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color

The National Consumer Law Center “NCLC” issued a report about what is called “installment loan contracts” or “agreements for sale”, calling them “toxic transactions”.  The parties to these contracts are (1) the owner of the home/property and (2) a buyer.  The owner agrees to sell the home/property to the buyer, but carries back a loan usually a long term loan, with a high-interest rate.  Many times the reason for the “carry back” is because the buyer cannot qualify for a traditional loan.  The report discloses that most of these contracts are focused on lower-income and minority buyers.  This report goes on to point out that these contracts are “built to fail” and are “predatory in nature”, benefiting only the sellers, at the expense of the borrowers.  Hence the term  “toxic transactions”.
Buyers are lured by the dream of home ownership; many are first time home buyers.  The buyers are misled or do not understand the financial burden caused by the high rate mortgage terms. In addition, most first time home buyers are not aware of the financial demand all home owners face – costs of repairs and maintenance.  Many of these homes are already in extremely poor condition and quickly require thousands of dollars just to put them into livable condition.  The sellers of these “toxic loans” count on the buyer defaulting so they can repossess the home, evict the owner and flip the house to another unsuspecting buyer.  Article by the New York Times describing this nightmare.
The NCLC report focuses on a Dallas based company, Harbour Portfolio Advisors, one of the larger national firms to emerge in the contract for deed market.   “The Dallas company has bought nearly 7,000 homes — most of them from the government-backed mortgage company Fannie Mae — and has been reselling them “as is,” often in need of major repairs, through contracts that critics contend lack basic consumer protections.”  A great majority of these homes were located in predominantly African-American neighborhoods.
CURRENT OR POTENTIAL ACTIONS:

1. The report urges the Consumer Financial Protection Bureau to take the lead in pushing for “comprehensive regulation” or pursuing enforcement actions against sellers who use predatory contracts.
2. Requires that all land contracts be recorded, that they use the same standard contract and that sellers be required to pay for an independent appraisal and inspection of the home before a sale.
3. The authorities in New York sent subpoenas to several companies this spring to determine how prevalent such contracts were in the state.
4. The Missouri attorney general in late May issued an alert warning residents to be wary of abuses with contract for deed sales.
5. New Mexico officials are also investigating reports that contract for deed home sales are targeting immigrant and Spanish-speaking populations, according to Hector Balderas, the state’s attorney general.

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