Applying an old tool to sell foreclosed houses
- Article by: STEVE BRANDT
- Star Tribune
- January 12, 2009 - 9:50 AM
A revamped version of an old -- and occasionally suspect -- home-finance tool will help credit-starved buyers purchase homes in foreclosure-glutted neighborhoods of Minneapolis and St. Paul.
The program announced Wednesday uses contracts for deed with new protections -- and requirements -- for home buyers who purchase property rehabbed by select nonprofits.
The program is aimed at people who don't qualify for mortgage loans under current tighter mortgage underwriting standards, but who can show financial counselors their family budget can cover house payments. Meanwhile, Mayor. R.T. Rybak separately announced a quadrupling of funding for a city program piloted last year that helps buyers with closing costs or down payment assistance on foreclosure-plagued blocks. That aid may be used with the new contract program or separately.
A contract for deed is a seller-financing tool under which a buyer receives the deed to a property only after making all payments, unlike a mortgage loan. A defaulting borrower can lose all payments and any claim to the property. Some North Side neighborhood leaders have warned of potential new scams built around such contracts because conventional financing is tight.
"It's open for a lot of abuse," said Gary Beatty, referring to contracts for deed. He will run the new program for Greater Metropolitan Housing Corporation (GMHC), a nonprofit agency.
"But if it's done properly, it's a very good tool that opens the door for a lot of home ownership opportunities."
Beatty said some borrowers may be people who got in foreclosure trouble with predatory subprime loans but who have an underlying ability to make house payments.
The program offers up to $200,000 in financing at a fixed 7.5 percent interest rate for owners who plan to occupy the property. It is available for one- to four-unit housing, including townhouses and condos.
Buyers must make no more than 115 percent of area median income, and put $2,000 or 2 percent down, whichever is less, toward closing costs or a down payment. They must work first with financial counselors who will help the buyers determine what amount of housing their budget can afford, then they can choose from homes within the Minneapolis or St. Paul inventories of GMHC, Dayton's Bluff Neighborhood Housing Services or selected other community development groups.
More than 60 such houses are currently being held by those groups, which are buying them from the foreclosing banks and often rehabbing them before sale. Most of the houses are in high-foreclosure, low-income areas of the two cities, especially north Minneapolis.
The contract for deed will have payments amortized on a 30-year schedule, but will have a balloon clause after three years on the assumption that a buyer making payments that long will be able to qualify for conventional financing. Money will be escrowed for taxes and insurance, and borrowers will get continuing financial counseling.
GMHC is buying and rehabbing its share of homes mostly with state foreclosure recovery money. But most of the contract-for-deed financing is originating with Sunrise Community Banks, using funds raised from socially conscious depositors through Sunrise's status as a federally designated community development lender. The remaining 20 percent is financed by the nonprofit Family Housing Fund.
Meanwhile, Rybak said the Federal Home Loan Bank of Des Moines, which provides residential mortgage credit, will add $1.5 million to the city's $500,000 Minneapolis Advantage program, which helps buyers with down payment and closing costs. The money must be used toward the purchase of foreclosed property and the owner must live in it for five years. The money may be used in 22 North Side, northeast and south-central neighborhoods.
Steve Brandt • 612-673-4438
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