Sarah B. Mancini will join hybrid hearing on “rent-to-own” home financing arrangements that exploit vulnerable homebuyers
WASHINGTON – Today, Sarah Bolling Mancini, co-director of advocacy at the National Consumer Law Center, will testify before the U.S. Senate Banking Subcommittee on Housing, Transportation, and Community Development at a hybrid hearing entitled “Exploiting the American Dream: How Abusive Land Contracts Prey on Vulnerable Homebuyers.”
“Land contracts and leases with option to buy are both costly and destructive detours that diminish the likelihood that consumers entering into these contracts will ever own a home,” said Mancini. “Our extensive work studying these transactions has led us to conclude that these alternative transactions do not provide a meaningful pathway to homeownership.”
Land contracts are a form of seller-financing in which the homebuyer promises to pay a fixed amount of money, at a certain interest rate, over a certain term (often 20 or 30 years). However, unlike conventional financing of homes, the deed to the home remains in the seller’s name until the buyer has paid the entire purchase price. While the buyers have all the responsibilities of homeownership, they have none of the rights that come with a clear title. In many states, buyers who fall behind on payments can be swiftly evicted, erasing all of their investment.
NCLC estimates that more than 50% of land contract transactions fail, compared to a foreclosure rate of roughly 1% for FHA-insured mortgages directed at first-time homebuyers. “While some non-profit community-oriented providers of land contracts appear to facilitate real homeownership opportunities, these are the exception rather than the rule,” Mancini added.
Some state statutes on land contracts provide just enough rights to consumers to incentivize sellers to formulate their contracts differently, prompting sellers to label transactions as leases with option to buy, even when in substance they are still land contracts.
“Certain leases with option to buy are really land installment contracts in disguise,” said Mancini. “Too often consumers in a lease with the option to buy take on unreasonable home repair burdens because they believe that they will soon own the home.”
Mancini recommends steps that Congress should take now to develop more data, improve the availability of traditional financing, and encourage enforcement of existing protections. Additionally, Mancini calls on the Consumer Financial Protection Bureau (CFPB) and state attorneys general to step up enforcement efforts against sellers who are attempting to evade federal or state laws through predatory and unlawful practices.
“To help would-be homeowners make progress towards the American Dream, we must focus on options that have a proven track record of success. Land contracts and lease-options are not among them,” Mancini concluded.