When the economy tanked in 2008, jobs vanished and homes vacated. Many homeowners ended upside-down on their house as values plummeted. Even homeowners with equity left had trouble reaching it because they fell short of a traditional cash-out refinance. Desperate to stay in their dwelling, these victims were seduced by predatory lenders.
Companies and individuals (the “lender”) would knock at a distressed homeowner’s door and offer to help save their home via a Contract for Deed. Under the arrangement, the homeowner would transfer their house to the lender and then purchase it back. After the switch, lenders would refinance the home, often times cashing out the equity and keeping a portion of the cash as a fee. The Contract would then require monthly payments from the original homeowner equal to the cost of the lender’s payment, plus insurance, plus taxes. However, a predatory lender would fill his pockets by refinancing the home and then charging the cash-strapped homeowner an interest rate two or three times greater than before. In many cases, these homeowners, desperate to save their house, agreed to a larger payment than the one they had before they went into foreclosure – the payment that choked them before.
In addition, the balloon payment often exceeded what was owed before the foreclosure. Moreover, many of these Contracts for Deed held a two year term; not nearly enough time for the disillusioned homeowner to rehabilitate their credit to get a loan for the balloon payment.
These types of Contracts for Deed were destined to fail, and in some cases, designed to fail. Lenders snatched away houses after homeowners missed a payment or failed to get financing for the balloon payment. And, homeowners discovered that the private lender drained any equity they had built. Because of these unethical practices, the Minnesota legislature enacted laws to protect hunted homeowners and punish predatory lenders.