When somebody is living in despair, somebody else can make a killing.
For decades in Chicago, from the gray days of the World War II through the restless days of the 1960s Civil Rights movement, black people often lived in such despair — as many do now — discriminated in employment and segregated by racist housing practices. In their difficulties, they became targets.
A common predatory scam was mortgage-free contract housing sales, which typically carried exorbitant interest rates, did not allow buyers to accumulate home equity, and threatened eviction if the buyer missed a single month’s payment. Contract sales offered the promise of home ownership to people denied bank mortgages by racist redlining practices, but things almost never panned out as planned. Contract sales mostly just siphoned money out of black neighborhoods.
Now contract sales are making a comeback in largely minority Chicago neighborhoods, according to an investigative report in the Chicago Reader, and they look as questionable as ever. This is a financial arrangement that requires significant additional regulation to protect buyers, though we know this would run counter to the Trump administration’s general campaign to deregulate business.
Among other reforms, independent appraisals and inspections of homes should be required, paid for by the seller, and buyers who default should be reimbursed for money they spent on major repairs. Contracts should be registered publicly with the state so that their very existence can’t later be denied by the seller. All building code violations should be disclosed in writing, as well as the most recent appraised value according to the county assessor.
More generally, measures should be taken to protect people who clearly don’t have the financial means from being sucked into a sale. Had such regulations been in place, Carolyn Smith, an Austin neighborhood resident featured in the Chicago Reader report, might have been spared substantial expenses she cannot afford, as well as endless anxiety.
Tired of dealing with “slumlords” as a renter, Smith bought a house on contract in 2011. She made a down payment of $900. She agreed to pay $34,025 over 30 years, not appreciating — though it was written in the contract — that, at 10 percent interest, this would come to more than $107,000. The house had no hot-water heater, furnace or kitchen sink, but in her desire to finally have a place of her own, Smith agreed to buy the place “as is.” She also agreed to make those big repairs immediately or risk being thrown out.
Smith had no idea that the owner of the house, Texas-based Harbour Portfolio Advisors, had bought it from Fannie Mae, the federally-sponsored mortgage company, that same year for just $519.
Two years later, when Smith retired from a job as an adult educator at Malcolm X College, her monthly income dropped to $1,100 — and she has struggled since then to make basic repairs to the house while also making monthly payments of $545. The house was in worse shape than she had ever imagined. Bricks from the crumbling chimney were falling into the alley.
Companies that sell houses on contract defend the practice as a way to offer a chance of home ownership to people with sketchy credit in the wake of the 2008 mortgage crisis. The “majority of our buyers have benefited so much more than had they been forced to remain renters for life,” a representative for one company told reporter Rebecca Burns, who conducted her investigation for The Chicago Reader and the Investigative Fund.
That might be a terrific defense if most or even a large majority of contract home buyers actually managed, at the end of the day, to pay off their loans and obtain the deeds to their homes. But historically, that happened almost never.
A bill that includes a number of the reforms we have suggested here, sponsored by Peoria Democrat David Koehler, is pending in the state Senate. It likely will be revised before any vote later this month.
As written so far, we can’t imagine why contract sellers would object to it. Not if they are committed to running an ethical business.
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