News Column

UT Study Unmasks Home Loan Contract Deceptions

Oct. 23, 2012

Ricardo Gandara, Austin American-Statesman

home sold

Years after state reforms were passed to limit the practice, University of Texas researchers have found that Texas families continue to buy land and homes using informal transactions called "contracts for deed," often paying interest rates as high as 20 percent.

And though the total number of recorded contracts for deed -- more than 16,000 over the past 20 years, according to the study -- has dropped by two-thirds, most of the estimated still-active contracts, about 5,500, are in Maverick, Webb, Travis and Bastrop counties. Maverick and Webb are among the counties on the border with Mexico that have high numbers of colonias -- makeshift settlements that lack basic amenities.

The contracts -- sometimes done by hand on the kitchen table -- can result in "clouded" titles that are often not recorded with county clerks and can put buyers at risk, according to authors of the "Contract for Deed Prevalence Project," which was released this week.

"If a buyer fails to make a payment on a contract for deed, he or she may risk losing the property, the home he or she built upon it, and all of the payments previously made on the property," said Lucille Wood, a research fellow at the UT School of Law. Other co-authors were UT sociology professor Pete Ward and Heather Way, director of the Law School's community development clinic.

There were 772 of the problematic contracts in Travis County and 739 in Bastrop County, according to the study's database. About 19 percent of the housing units in so-called informal homestead subdivisions in Bastrop County are owned with such contracts, the third-highest percentage in the state.

A key element in most contracts for deed provides that if a buyer defaults, the seller can regain possession and retain the buyer's prior payments. "You can lose everything," said Wood.

In addition to combing county records, researchers surveyed 1,300 Texas households in colonias and informal subdivisions in six counties on the border and two in Central Texas. Ninety-six percent were Hispanic and living in "deep poverty," they said.

They found that 11 percent of the surveyed homestead owners in Hays County and 8 percent of those in Guadalupe County currently hold their properties through even dicier transactions: unrecorded contracts for deed, for which no public record of ownership exists. Known in the housing industry as "poor man's mortgages," they are often handwritten on scraps of paper and in some cases may be simply oral agreements.

Among the trends identified by the study, which was commissioned by the Texas Department of Housing and Community Affairs:

A "dramatic increase in clouded property titles" is anticipated in coming years as contract for deed properties are passed down to heirs, often without formal wills.

Consumer-to-consumer transactions in older colonias, financed by sellers, are replacing sales by developers, with an accompanying lack of buyer safeguards such as title insurance and recorded deeds.

Nearly half the homeowners in colonias and informal homestead subdivisions do not claim the homestead tax exemption to which they are entitled.

In 1995 and 2001, the Texas Legislature passed laws to steer developers from using contracts for deed. As a result, at least 73 percent of developer sales between 2003 and 2010 in the colonias incorporated conventional deeds and deeds for trust financing, according to the study.

Still, the researchers called for "stronger oversight of state laws protecting consumers in land transactions" while noting that the Texas attorney general's office invests no resources in enforcing contract for deed laws.Teresa Farfan with the attorney general's office said the agency normally investigates "large-scale" consumer fraud, not individual cases.

The Department of Housing and Community Affairs, the state agency charged with helping homeowners convert their problematic contracts, assisted just 18 homeowners in 2011 and none in 2010.

"We were making a shift from one funding source, a mix of state and federal funds with one set of rules, to another funding source, federal funds with its own set of rules," spokesman Gordon Anderson said when asked why the number was so low. He said the agency has just started to evaluate the new study and has help centers set up to aid colonia residents.

Since 1999, the agency has done 848 conversions at a cost of $14.1 million, Anderson said. Homeowners qualify for forgivable federal loans for home improvements up to $40,000 or a complete reconstruction up to $85,000 to bring the structure up to code.

Other recommendations include state adoption of an easy-to-understand land information system that would be available online and a simple deed and deed to trust template for consumer-to-consumer transactions.

Demographics of households in informal homestead subdivisions:

-- Of the 1,287 residents surveyed, 96 percent were Hispanic and 62 percent were female.

-- 57 percent of the owners and 63 percent of the renters surveyed made less than $1,600 a month.

-- The average household size was 4.1 people, higher than the state average of 2.8.

-- 75 percent of the heads of households were married or in a common law union; only 7 percent were divorced.

-- 54 percent purchased their land or home from a developer, and 34 percent bought from another consumer.

For help with contracts for deed problems:

-- For legal questions on a contract conversion, call Texas RioGrande Legal Aid, 888-988-9996.

-- El Paso Collaborative for Community and Economic Development, 915-590-1210

-- Adults and Youths United Development Association, 915-851-0272

Distributed by MCT Information Services



Source: (c) 2012 Austin American-Statesman, Texas


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