Inside Financial Services

Let’s Not Be Quick to Bash Contract-for-Deed Sales

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One of the reasons so many housing markets recovered so quickly after their crashes was the emergence of a slew of private investors who bought foreclosed-upon homes in bulk at rock-bottom prices. Some of those investors renovated the properties and turned them into rentals. Others simply sold the houses, usually as-is, to individuals. Since the banks had largely exited that part of the mortgage market by then, sellers provided the financing themselves in so-called “contract for deed” transactions. The arrival of private capital helped values recover and brought properties back on the market at reasonable prices. It was a great example of the free market going to work to fix a problem and resolve chaos. Unfortunately, no good deed will go unpunished for long. From the New York Times:

A revival in seller-financed home sales aimed at people who cannot qualify for a mortgage has started to attract scrutiny from the nation’s top consumer watchdog.

The Consumer Financial Protection Bureau recently assigned two enforcement lawyers to investigate the prevalence of seller-financed home transactions and determine whether the terms of some deals may violate federal truth in lending laws, said two people with direct knowledge of the matter but who were not authorized to speak publicly at the request of federal officials. [Emph. added.]

Ugh, what a waste. In a contract-for-deed sale, the buyer makes monthly installment payments and takes title to the property at the end of the contract, which may be up to 30 years. In the meantime he’s usually responsible for taxes and upkeep. The concerns the loans’ critics (which seems to include the Times itself) have about all this is that some of the properties in question are run-down,  that buyers sometimes default, and that private housing investors prefer to earn a reasonable return. All of which is to say, the transactions occurred in the real world.

I’m having trouble seeing where the problem is. Contrary to what the Times seems to imply, lenders prefer that their borrowers not default. Rather, they want their properties to produce a steady stream of monthly revenue that, in aggregate, will comfortably exceed what they paid for the house. Evictions are a hassle and are expensive. Further, owner/lenders want the properties to be good enough condition that they are habitable. Might some of the properties be in less than ideal condition? Of course! But the buyer knew that when he agreed to the transaction.

Contract-for-deed transactions were a key tool in helping blighted housing markets around the country begin to recover. The deals were entered into by adults who knew what they were doing. No not every transaction will end happily or profitably. That’s the way the world works. That the CFPB is considering looking into all this now seems more like nanny-state meddling than sober-minded regulation.

What do you think? Let me know!

4 Responses to “Let’s Not Be Quick to Bash Contract-for-Deed Sales”

  1. Avatar Robert E Frey, Seattle, WA

    I agree with you totally. The CFPB is sticking its nose in far too many things and with far too much power to damage the real world.

    In the 1960’s and 70’s when Boeing laid off 100,000 people and there were billboards announcing, “Will the last person leaving turn out the lights,” real estate contract sales (and assumption of existing mortgages) were common and valuable financing methods. The major consumer problems with contract sales at the time related to the fact sellers stayed in title until a contract was fulfilled and the buyer’s interest could literally be forfeited within a very short period time, i.e. 30-60 days. Because of those contract terms, some lenders used them in a predatory way. Assuming modern-day contracts are more favorably written, I see nothing wrong.

  2. Avatar David the CPA and NRA Instructor

    The we know better than you PROGRESSIVES strike again. The Darth Vader conspiracy group was running out of things to do. I think they are now part of the BORG COLLECTIVE.

  3. Avatar Randall Grossman

    I am going to withhold judgement until we hear what the investigators find. Your suspicion of the CFPB is understandable, Tom, and I generally share it. The question is, can we prevent abusive lending (implied rates far in excess of any reasonable risk premium) while preserving the likely 98% of such loans that are reasonably priced and thus offer options in a market that is otherwise not well served.

    As you noted in yesterday’s criticism of Google’s refusal to accept payday lender advertising, we look to the government, not Silicon Valley, to ensure that consumers are getting a fair deal and not being exploited. Good regulation strikes a balance between enforcing that fair playing field and leaving room for innovation and products that address unserved customers.

  4. Avatar Morgan's Mom

    What a terrible idea. Can I as a citizen of the United States of America choose to enter a deal or provide a deal based on mutual agreement? What is this country coming to.
    Next thing you know they, (big brother) will decide I can’t fairly sell my car or maybe my old sofa and they need to regulate that too. Preposterous!

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