01 December 2005

Former Mayor Webb Join Bad Guys

Former Denver Mayor Wellington Webb is buying a business that specializes in lease to own programs for subprime home buyers. While such arrangements don't, in theory, have to exploit the poor, they usually do.

The worst part of the lease to own exploitation takes place with personal property, where people end up paying far more to lease to own property than the would to purchase identical property on even high interest credit cards. Many people pay enough to purchase the property with traditional financing, but in the end, get nothing.

But, the typical lease to own contract, and cousins like the land sale contract, tend to be economically equivalent to a mortgage with a forfeiture clause that would be illegal and void in a traditional mortgage. If you buy and house and then sell it, you come away with equity from reducing your mortgage balance and rising home prices (less the costs of sale). If you lease to own, and then decide not to buy, you get nothing.

Proponents argue that a lease to own contact, unlike a traditional mortgage, puts the risk of a collapsing real estate bubble in the hands of the landlord-seller, rather than the tenant-buyer. But, given the small amount of equity common in real estate financing transactions these days, and the fact that most marginal wealth tenant-buyers are eligible for Chapter 7 bankruptcies, even under the newly effective more restrictive provisions of the bankruptcy law, these differences are largely illusory.

It is a pity that a former Mayor concerned about providing housing to the poor couldn't have cast in his lot with a worthier enterprise, such as one directed at providing prime lending to eligible people, particularly in minority community, who make the foolish mistake of borrowing from high rate subprime lenders instead.

1 comment:

Dex said...

this is huge. when i worked with acorn, i had the chance to see just how a lot of these "subprime" lenders worked (too many of which are run by major finance corps, who essentially contract the work out through these companies). most of them are quite literally little better than gangsters.