Sub­prime may be out, but Wall Street finds another way to fi­nance home­buy­ers with bad credit

A pri­vate equity firm fi­nances deals for peo­ple with bad credit “It’s eas­ier to take a prop­erty back quickly,” says a con­sumer lawyer

Bloomberg Businessweek (Asia) - - NEWS - −Heather Perl­berg

Sub­prime mort­gages have all but dis­ap­peared, but buy­ers with bad credit can still own a home. If they come up with a nom­i­nal down pay­ment and stay cur­rent on monthly bills, they’ll get ti­tle to the prop­erty—af­ter as long as 30 years. One missed pay­ment, though, and their con­tracts say they could lose all their money and be tossed out.

His­tor­i­cally, such deals have of­ten ended badly for low-in­come buy­ers. Now some are be­ing fi­nanced by Apollo Global Man­age­ment, an in­vest­ment firm that over­sees as­sets of $170 bil­lion. Apollo’s in­vest­ment in what it calls seller-fi­nanced trans­ac­tions is com­par­a­tively small, but it’s a step

“The rea­son we went this route is be­cause I didn’t think our credit was up to par”

many other Wall Street firms have been wary of tak­ing.

Since the 2008 mort­gage crisis, ma­jor lenders have largely shunned the riski­est buy­ers. Into that void have come non­bank fi­nance com­pa­nies. Apollo, headed by bil­lion­aire Leon Black, started its seller-fi­nanc­ing busi­ness in 2014 in one of its real es­tate in­vest­ment trusts. Through a Ba­ton Rouge, La.-based com­pany called

Home Ser­vic­ing, it in­vested more than $40 mil­lion to buy and ren­o­vate houses, mostly in the South­east. Home Ser­vic­ing mar­kets the homes along with seller fi­nanc­ing, which is also some­times called owner fi­nanc­ing, con­tract-for-deed, or bond-for-ti­tle.

What­ever the name, the idea’s the same: Buy­ers end up on a long, un­cer­tain path to truly own­ing a home, while Apollo’s in­vestors get a chance to profit from bor­row­ers who don’t qual­ify for a reg­u­lar mort­gage. Through a spokesman, Charles Zehren, Apollo de­clined to com­ment; Home Ser­vic­ing also de­clined to com­ment.

The agree­ments of­fer few of the priv­i­leges of a mort­gage or a rental con­tract. In a mort­gage, the buyer gets le­gal ti­tle to the prop­erty; in a seller-fi­nanced con­tract, the seller keeps it. Mort­gage bor­row­ers can im­prove their credit with on-time pay­ments, but it’s un­clear if Home Ser­vic­ing is re­port­ing such pay­ments to credit com­pa­nies. In a rental, a land­lord pays for re­pairs, taxes, and in­sur­ance. Home Ser­vic­ing con­tracts make the buyer re­spon­si­ble for those costs.

While the con­tracts vary by state, dozens re­viewed by Bloomberg show that buy­ers don’t own the home or claim to the deed un­til the full pur­chase price is paid off, up to 30 years later. If buy­ers fail to keep up to date on in­sur­ance or are more than 30 days late with a pay­ment, they for­feit any in­ter­est in the prop­erty and the money put into it.

In most states, fewer con­sumer pro­tec­tions ap­ply to this kind of trans­ac­tion than to a mort­gage loan, says Sarah Bolling Mancini, an at­tor­ney with the Na­tional Con­sumer Law Cen­ter. “Gen­er­ally it’s eas­ier to take a prop­erty back quickly if the bor­rower de­faults,” she says. Such agree­ments may help some buy­ers with few op­tions. But sim­i­lar deals by other com­pa­nies have a preda­tory his­tory, par­tic­u­larly in mi­nor­ity com­mu­ni­ties, says Sarah Edel­man, di­rec­tor of hous­ing pol­icy at the Cen­ter for Amer­i­can Progress in Wash­ing­ton.

KKR is one other prom­i­nent firm to in­vest in the busi­ness, with a stake of as much as $40 mil­lion in New York­based Bat­tery Point Fi­nan­cial. “The liq­uid­ity and rep­u­ta­tion risk has scared peo­ple off over time, but I think that can change,” says Jeremy Healey, who co-founded Bat­tery Point in 2013.

If Bat­tery Point sells a home fol­low­ing a de­fault, it pledges to take only the re­main­ing amount of money it was owed and re­funds the delin­quent owner any ex­tra, ac­cord­ing to the com­pany. It also says it’s work­ing to re­port monthly pay­ments to credit agen­cies so buy­ers may be able to im­prove their credit and get mort­gages. KKR de­clined to com­ment.

Marie Simpson, 63, of Columbia, S.C., was in­tro­duced to Home Ser­vic­ing by “Buy, Don’t Rent” signs near the home she rented. “The rea­son we went this route is be­cause I didn’t think our credit was up to par,” says Simpson, who works for the state’s pro­ba­tion and pa­role de­part­ment. She and her hus­band agreed in June to pay $106,900 for a three­bed­room house, al­most dou­ble what Home Ser­vices paid for it less than a year be­fore, ac­cord­ing to pub­lic records. The down pay­ment was $2,000, Simpson says. The in­ter­est rate comes to 7.9 per­cent; the av­er­age rate for a 30-year mort­gage was 3.7 per­cent on March 31, ac­cord­ing to Fred­die Mac.

Home Ser­vic­ing uses the term “owner fi­nanc­ing” in ads; when Apollo talks to in­vestors, it calls it seller fi­nanc­ing. Such con­fu­sion over what to even call the con­tracts is one rea­son Teresa Bern­hardt, a real es­tate lawyer in Mem­phis, says she steers clients away.

While Simpson was mov­ing into her new home, she says she dis­cov­ered the air con­di­tioner was bro­ken and there was no hot wa­ter. Though the com­pany has been known to make re­pairs, the agree­ment was for the home “as is.” Home Ser­vic­ing sent a re­pair­man, Simpson says. “There are still things that need to be done, but it takes time,” she says. “We knew what we were get­ting into.”

The bot­tom line Mort­gages are scarce for peo­ple with poor credit, and Apollo sees an op­por­tu­nity in a con­tro­ver­sial form of fi­nanc­ing.


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