African Americans in the same neighborhoods decimated by subprime lending are now being targeted with new predatory loan offerings, a lawsuit argues.
ATLANTA—It was not until a few years after he moved in that Zachary Anderson realized he was not, in fact, the owner of the house he thought he’d purchased. Anderson had already spent tens of thousands of dollars repairing a hole in the roof, replacing a cracked sidewalk, and fixing the ceilings of the small two-bedroom home where he lives in southwest Atlanta, when he learned the truth. He was trying to get a reduction in his property taxes when his brother, who was helping him with his taxes, looked up the property in public records and found that the owner of the home was actually listed as Harbour Portfolio VII LP.
“It’s like a trick,” Anderson, a 57-year-old, told me, sitting in front of a wood-burning fireplace he’d installed in the living room of the house to lower his heating bills. “They get free work out of a lot of people.” Anderson had entered into a contract for deed, a type of transaction that was rampant in the 1950s and 1960s before African Americans had access to avenues of conventional lending. In a contract for deed, the buyer purchases an agreement for the deed rather than buying the deed itself. The tenant has to fulfill the conditions of the agreement in order to get the deed, conditions that usually include making a series of timely payments over decades, paying for home repairs and general maintenance of the home, and paying taxes and insurance on the property. If he misses one payment, thus violating the agreement, he can be evicted, losing all the equity he put into the home.
Though half a century ago, contract-for-deed arrangements were often made between an individual real-estate speculator and a tenant, today they are more commonly made between a tenant and a big private investment company, like Harbour Portfolio Advisors, which is based in Texas and has entered into thousands of contract-for-deed arrangements across the country.
My colleague Ta-Nehisi Coates detailed contract-for-deed arrangements—also called rent-to-own deals—in his 2014 Atlantic cover story “The Case for Reparations,” which looked at the prevalence of such arrangements in 1950s Chicago. What is surprising today is that, according to some housing advocates, these arrangements are in some ways even more predatory than the ones of half a century ago, even after decades of laws and regulations enacted to prevent racial discrimination in the housing market. “It was bad in the mid-20th century, but it is even worse now,” said Beryl Satter, a history professor at Rutgers University-Newark who wrote Family Properties, a book on the history of predatory lending in Chicago, about contract-for-deed arrangements. “The housing is in way worse shape, the markups are grotesque, and these people have been through multiple forms of credit exploitation, which is partially why they’re in this market.”
Through its lawyer, Harbour contested the idea that these contracts are exploitative. “It is simply not true that any of these agreements were predatory in nature,” David K. Stein, a lawyer for Harbour, told me. Instead, he said, contract-for-deed arrangements, which have been legal for centuries, give families who might not otherwise have the chance the opportunity to own a home.
Contract-for-deed arrangements in today’s housing market came under scrutiny more recently in 2016, when The New York Times reported how low-income buyers in Ohio were entering into these agreements and then losing the homes. Soon afterwards, the Consumer Financial Protection Bureau said it had assigned two enforcement lawyers to look into whether contract-for-deed transactions violate federal truth-in-lending laws. But now, advocates in Atlanta are raising another issue with contract-for-deed arrangements—alleging that they are racially discriminatory and that they violate the Fair Housing Act, along with various other state and federal laws.
In a lawsuit filed in a U.S. district court last year, a group of plaintiffs represented by the Atlanta Legal Aid Society alleges that Harbour Portfolio, the group that owns the home where Zachary Anderson lives, specifically targeted African American neighborhoods with its contract-for-deed products. This violates the Fair Housing Act, the lawsuit argues, because it markets a predatory loan product specifically to African Americans. “Basically, what they were counting on is that people who were not already familiar with the home-buying process would be taken in by the American dream of owning a home,” Kristen Tullos, a lawyer for Atlanta Legal Aid, told me. Harbour moved to dismiss the case, but last month, a judge ruled that most of the plaintiffs’ claims in the case, including their core Fair Housing Act claim, could go forward.
The Fair Housing Act, enacted exactly 50 years ago on April 11, 1968, makes it illegal to deny housing or loans to people in residential real-estate transactions on the basis of race. Subsequent cases have also found that targeting bad loan products at certain racial groups—a practice known as “reverse redlining”—also violates the Fair Housing Act. If contract-for-deed agreements are found by a judge to be aimed at African-American neighborhoods, it will be evidence that the country has returned to the untenable position where it was half a century ago.
In the 1950s and 1960s, African Americans were prohibited from borrowing through traditional means, so they entered into contract-for-deed arrangements, which left them with little equity to pass on to their children. This had long-lasting effects—African Americans still have, on average, much lower credit scores than whites, in part because they didn’t have the means of building wealth through homeownership that whites had. In the 1980s, 1990s, and 2000s, banks started lending more to African-American buyers, but these buyers were frequently targeted by subprime loans with high interest payments and terms that were difficult to fulfill. (African-American borrowers were 76 percent more likely than white borrowers to have lost their homes to foreclosure during the recession, according to the Center for Responsible Lending.) Now that many African Americans in cities like Atlanta were foreclosed on during the subprime crisis, many of them have bad credit as a result—which means they can’t buy homes the traditional way, and so are being offered contract-for-deed payments once again.
This tees up another cycle of debt and lost equity in the housing market, and in the larger economy that could continue to drag down the very people that the law 50 years ago had tried to protect.
Zachary Anderson has worked all his life, but he has never owned a home. For decades, he was a mechanic for the city of East Point, a predominantly African-American suburb of Atlanta, making good money, but never enough to save up for a big down payment. This is not unusual: Black households overall have less savings than white ones, in part because of historical practices that prevented them from building equity. While the typical white household could replace almost 10 months of income if they liquidated all their financial accounts, the typical black household could replace only 23 days, according to a 2015 report from the Pew Charitable Trusts.
It was in 2010, while he was still working, living in a small apartment in the College Park area of Atlanta, that Anderson started seeing the signs around East Point. “SALE,” they read, in big red letters, and then listed the amounts buyers would have to put down—often as low as $700—and the amount they’d have to pay per month—often as low as $375—for the homes along the block. Anderson, sick of his cramped apartment and of hearing his neighbors’ every move, called the number listed on the sign and asked if they had any other houses in Atlanta. They referred him to a website that listed some of the homes, so Anderson went out and bought a computer so that he could start looking.
He eventually found a house he could afford in the Capitol View neighborhood of Atlanta, and the company gave him the code to a lock on the door that would enable him to get into the house and look around. The home, a small bungalow, was a fixer-upper. There was a hole in the roof, no stove or refrigerator, and tree branches invading the property. But Anderson knew how to work with his hands. He could put his own time and money into fixing up the home, he thought, which made it a good deal. The money he had to pay monthly, at $495, was less than he was paying in rent at the time. After a $1,000 deposit, he was told, the home, worth $46,750, would be his. (Harbour’s attorney declined to comment on the experiences of Anderson or any other specific individual.)
The contract, sent to him in the mail, also required that he paid all taxes on the property and kept the property insured. If he failed to make any of the agreed-upon payments, the contract said, he would forfeit all the money he had paid to the seller. He signed and initialed the contract in front of a notary, and sent it back to the company. A little while later, he received a letter in the mail congratulating him on becoming a homeowner. He could move in once he changed the locks, it said. He never met a single person from Harbour throughout the whole process.
Of course, it could be argued that Anderson should have known better than to enter into this type of contract, that he should have read the fine print. That he should have persevered until he could buy a home the traditional way. Harbour’s lawyer told me the individuals were provided “full disclosure” of the nature of the arrangement before they even first visited the homes. “It would be impossible for any reasonable person to not understand the nature of the transaction,” Stein said.
But Anderson had never bought a home before. He didn’t know that this wasn’t the traditional way homes were sold. “I thought I went and bought a house,” he told me. He thought he had just stumbled across a deal.
He also didn’t know how difficult it would be to keep up the terms of the contract, because he didn’t realize just how much work the house would need. There is no requirement that a home inspector look at the house before a contract-for-deed agreement is signed. When Harbour told him he needed to get insurance, he says, the insurance company started sending him problems with the house that he didn’t even know existed—one document he showed me, for example, informed him that his “rake board,” which is a piece of wood near his eaves, was showing deterioration.