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