“The market is growing in part because so many would-be home buyers with damaged credit histories cannot get loans. Banks are unwilling to write mortgages to riskier clients after being fined billions of dollars for pushing borrowers into unaffordable subprime mortgages before the crisis…
…Last year, the number of new mortgages worth $100,000 or less for homes in the largest metropolitan areas in the United States was at its lowest point in a decade, according to CoreLogic, a financial services research firm. “There’s a whole underbelly of real estate that’s not through traditional sale,” said Robert Doggett, general counsel for Texas RioGrande Legal Aid and a critic of contracts for deeds. “It’s not a problem of yesteryear. It’s coming back.”,Alexandra Stevenson and Matthew Goldstein, “Wall Street Veterans Bet on Low-Income Home Buyers”, The New York Times, April 19, 2016
“This is the unintended (and worse) consequence of the government making riskier mortgage loans illegal and/or demonizing them. If they aren’t illegal, they are too risky reputation and litigation-wise for regulated banks and traditional mortgage bankers, so these private, “hard money” folks are stepping in to fill the demand from these poorer Americans, at worse rates and terms. (Think about it. These Contract for Deeds don’t require “foreclosure”, just “eviction”….which somehow, while effectively the same, isn’t the same in the liberal political classes’ eyes.) I don’t think that’s what was intended, but that’s what’s happened.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Wall Street Veterans Bet on Low-Income Home Buyers
Daniel Sparks helped create Shelter Growth Capital Partners, which buys homes that were foreclosed on during the financial crisis and later resold to buyers. Credit Brendan Smialowski for The New York Times
As the head of Goldman Sachs’s mortgage department, Daniel Sparks helped make the bank more than a billion dollars betting against the market as housing prices began to crash in 2007.
Today, he is betting on home buyers who no longer qualify for mortgages in the fallout of that housing crisis.
Shelter Growth Capital Partners, an investment firm Mr. Sparks founded in 2014 with two other former Goldman Sachs executives, has been buying homes that were foreclosed on during the financial crisis and later resold to buyers under long-term installment contracts.
The firm has bought just over 200 homes from Harbour Portfolio Advisors, a Dallas investment firm that has specialized in selling homes to lower-income buyers through what is known as a contract for deed. In these deals, a seller provides the buyer with a long-term, high-interest loan, with the promise of actually owning the home at the end of it.
These contracts, a form of seller financing, have ballooned in recent years as low-income families unable to get traditional mortgages have turned to alternate ways to buy homes.
The homes are often sold “as is,” in need of costly repairs and renovations, and many of the transactions end in eviction when buyers fall behind on payments.
The market is growing in part because so many would-be home buyers with damaged credit histories cannot get loans. Banks are unwilling to write mortgages to riskier clients after being fined billions of dollars for pushing borrowers into unaffordable subprime mortgages before the crisis.
Last year, the number of new mortgages worth $100,000 or less for homes in the largest metropolitan areas in the United States was at its lowest point in a decade, according to CoreLogic, a financial services research firm.
“There’s a whole underbelly of real estate that’s not through traditional sale,” said Robert Doggett, general counsel for Texas RioGrande Legal Aid and a critic of contracts for deeds. “It’s not a problem of yesteryear. It’s coming back.”
Other Wall Street veterans have entered the scene nationally, too.
Battery Point Financial, founded by Jeremy Healey in 2013, is focusing exclusively on buying homes in smaller cities to sell them to buyers through contracts for deeds. Mr. Healey, a former mortgage trader at Goldman Sachs, has $40 million in backing from Kohlberg Kravis Roberts & Company, the private equitygiant.
One reason the contract for deed market has become popular among investment firms is that under many contracts, buyers can be evicted if they default on their loans. That is very different from traditional mortgages, under which the foreclosure process can be lengthy and costly.
Shelter Growth, based in Stamford, Conn., has about $500 million under management. The firm says on its website that it is “creating investments to capitalize on the next phase of the U.S. mortgage” market.
Most of the homes Shelter Growth bought from Harbour appear to have been purchased in a bundled transaction in December by the firm’s SG Capital Partners L.L.C. affiliate, according to an analysis by the research firm RealtyTrac. But Shelter Growth has also bought a number of other homes from Harbour this year, with some purchases recorded as recently as last month.
Shelter Growth paid an average of $22,000 for the homes it bought from Harbour, according to public filings and RealtyTrac. Harbour, for its part, bought most of the homes in its portfolio for an average of $8,000, through bulk sales by Fannie Mae.
Senator Carl Levin, center, talking with Senators Tom Coburn and John McCain at a 2010 hearing where Daniel Sparks was asked about mortgage securities. Credit Doug Mills/The New York Times
The homes Harbour sold to Mr. Sparks’s firm are in two dozen states, but most are clustered in Michigan, Ohio, Georgia, Missouri and Alabama, according to RealtyTrac.
One such sale, for $25,500, was for a house in Elyria, Ohio.
In April 2011, Harbour sold a contract for deed on the house for $36,300, according to public filings. Under the terms of that deal, the 24-year-old woman who now lives in the house is required to pay 10 percent interest or a monthly base payment of $314 — a sum that does not include property taxes, insurance or any outlays for repairs or renovations.
Under a contract for deed, a buyer gets the legal title to the home either at the end of the contract, which can run anywhere from 20 to 40 years, or if the buyer is able to pay off the balance owed all in one go.
After the financial crisis, Harbour emerged as one of the larger national players in the contract for deed market. The firm bought more than 6,700 single-family homes, most of them from Fannie Mae.
But in recent months, Harbour has sold more than 600 homes to investment firms like Shelter Growth and individual investors, according to public filings.
A review of some of the homes sold to SG Capital found that the contracts used by Harbour have drawn criticism from some housing lawyers because the documents do not provide buyers with a specified time period to remedy a default, give Harbour the right to immediately convert the agreement to a month-to-month tenancy upon a default, and include an arbitration clause for settling some disputes.
Through his lawyer, Jacqueline Mallett, the founder of Harbour, Charles A. Vose III, declined to comment for this article.
It is unclear whether Mr. Sparks’s firm plans to change the contracts or abide by the terms. Mr. Sparks declined to comment.
Another buyer of Harbour homes with contracts for deeds in place is New York Mortgage Trust, a publicly traded mortgage real estate investment trust, or REIT. The firm has bought at least 130 homes from Harbour through one its asset managers, Headlands Asset Management, adding to the mortgage REIT’s relatively small portfolio of contracts for deeds.
Steven Mumma, chairman and chief executive of New York Mortgage Trust, says the company, which has a portfolio of roughly $763 million worth of performing and reperforming mortgages, is not in the business of foreclosing on people. He says that the contracts acquired from Harbour were signed two or three years ago and that most of the buyers have kept up with their payments.
“We look at it as a loan, not as an opportunity to repossess,” Mr. Mumma said, with respect to contracts for deeds and homes bought from Harbour.
He says the company now uses its own loan-servicing firm to manage the homes and contracts it bought from Harbour, which has partnered with National Asset Advisors, a firm that operates out of a partly empty strip mall on the outskirts of Columbia, S.C.
SG Capital, the affiliate of Shelter Growth that has bought homes from Harbour, is licensed as either a mortgage servicer or a lender in 21 states. The firm’s investments typically have focused on so-called jumbo mortgages, which cannot be sold to either Fannie Mae or Freddie Mac because they are larger than the underwriting guidelines of the two government-backed mortgage finance companies.
Mr. Sparks is much less in the spotlight now than he was six years ago, when he became a target for lawmakers angered over Wall Street’s role in the 2008 financial crisis.
At a 2010 Senate hearing that focused on Goldman Sachs’s sale of securities backed mainly by subprime mortgages, Mr. Sparks was questioned by Carl Levin, then a Democratic senator from Michigan. During the proceedings, Mr. Levin pressed Mr. Sparks on why a Goldman colleague had used profanity in an email describing the quality of one such mortgage security that the firm was selling to institutional investors.
A somewhat uncomfortable-looking Mr. Sparks responded at the time that he interpreted the email to mean that “my performance on that deal was not good.”
A version of this article appears in print on April 18, 2016, on page B1 of the New York edition with the headline: Wall St. Veterans Are Betting on Low-Income Homebuyers.