The Money Pit

Part one of two On August 13, Greg Hoover, the director of housing and neighborhood development for the City of Davenport, presented a powerful report to the city council painting a disturbing picture of how people with poor credit are being exploited. These people, who don't have access to traditional mortgages from banks because of their credit histories, sign contracts to buy properties, yet the homes they agree to buy are often in poor condition, the report claimed. Furthermore, the contracts they sign include terms that make it likely that they'll forfeit the properties and their payments on them, and virtually guarantee they'll never own the homes even if they do make the payments.

The report spotlighted two contract sellers, although it did not cite the companies by name: Oak Helm Partners (referred to in the report as "Contract Seller One") and First Financial Group ("Contract Seller Two"). (While Oak Helm came before the city council and admitted to being Contract Seller One, First Financial has not been publicly identified as Contract Seller Two before now.)

The city's study included 1,138 contract sales in effect on December 31, 2000. Of those, 236 (20.7 percent) were properties bought from Oak Helm and associated companies, and 73 (6.4 percent) were bought from First Financial and associated companies. The remainder was attributed to "independent contract sellers."

In the report, city staff argues that there are two distinct problems associated with contract sales: The properties are disproportionately in substandard condition, and the terms of the contracts generally make it difficult or impossible for the contract buyer to build equity in a home.

The latter problem, the city argues, results in many contract "sales" that mimic rental agreements because of the frequency of property turnover and the lack of equity built by "buyers." The city further argues that these "contracts" might be deliberately structured to mislead the people living in these homes that they are buying while also circumventing state requirements that rental properties be inspected periodically.

The report cites a number of features of "predatory" land-sale contracts, including: "amortization that would require more than 30 years to retire the principal"; "fixed, minimal amount of monthly payment applied to principal reduction"; "initial down payment of a significant amount which would be forfeited when the buyer fails to meet the terms of the contract"; "balloon payments in two to five years"; and "'new' (that is, renegotiated) contract after balloon expires for the same property at a higher purchase price than the previous contract."

Representatives of Oak Helm and First Financial agreed that the report suggests that property conditions are a larger problem for Oak Helm while financing terms are more of a concern with First Financial properties.

Yet the two companies have differed in their reactions. Oak Helm does not dispute the way it was portrayed in the report. "I think the city did a decent job," said Nancy Coon, a partner in the company. Coon said she does question how the city arrived at some of its numbers, but "I'm not going to fight with the city over its statistics." Coon has also appeared before the city council, saying that Oak Helm supports the recommendations of the report, including point-of-sale inspections of properties.

First Financial, on the other hand, has been more defensive. The company has enlisted a public-relations firm, Victory Enterprises, to do its talking. Steve Grubbs, a former state legislator and president of Victory Enterprises, argues that the city report is misleading; that some of its statistics are inaccurate; that the city legal department has signed off on First Financial's contracts; and that the company has changed the terms of its contracts in recent years so that more of buyers' monthly payments is applied to loan principal. Grubbs claims that his client does not oppose the city's recommendations, some of which will be considered at Wednesday's city-council meeting.

Yet while Oak Helm genuinely seems to want to improve its record and be a good citizen, much of First Financial's talk doesn't hold up to scrutiny. And its apathy toward the city's recommendations suggests that the steps outlined in the report are little more than a first step toward fixing the problem of contract sales in Davenport.

Oak Helm

Oak Helm is the largest contract seller in Davenport and has been in business for more than 75 years.

Coon stresses that Oak Helm has helped hundreds of people with poor credit histories buy their homes. From 1998 to 2000, she said, 424 people paid off their Oak Helm loans. "It's a legitimate way to buy a house," she said. "If these people were renting, they would not have any equity."

Still, according to the city report, more than 41 percent of people who signed contracts to buy homes from Oak Helm in 1997 had forfeited their properties by 1999. According to Hoover, conventional mortgage rates have a 2- to 4-percent foreclosure rate.

Coon claims that Oak Helm's forfeiture rate is lower than the one cited in the city's report but does not dispute the figure vigorously. The company's record with forfeitures "hasn't been perfect, but it's been going down," she said. Coon provided statistics that show that of Oak Helm's 271 contracts at the end of 2000, 35 buyers (17.7 percent) had defaulted on their loans and forfeited their properties. Coon said she could not provide statistics from other years.

The terms of contracts with Oak Helm are generally in line with the risk associated with "subprime" lending - the market for people with a history of poor credit. Down payments are relatively low - approximately 3 percent - and the interest rate is 12 percent. Nearly all contracts include a "balloon payment" - the remainder of the loan - and buyers typically refinance their contracts at that time, either with a bank, Oak Helm, or another subprime lender. If the contract is renewed with Oak Helm at the same terms each time a balloon payment comes due, a buyer will own the home in an average of 21 years, according to the city report.

Oak Helm also uses a "truth-in-lending disclosure" form that shows buyers the total amount of the loan, the total amount of payments, and when those payments are due. In a sample Oak Helm is offering to the city council, a person who signs a contract on a $40,000 home in August 2001 will have a balloon payment of $36,988 in 2006. Minus a down payment of $1,000, the buyer will have built in slightly more than 5 percent equity in the home in five years. The city report includes an analysis of a sample conventional mortgage in which the purchaser would have 5.5 percent equity at the five-year balloon-payment due date.

The city's larger issue with Oak Helm is the condition of its properties. According to the city report, 35.2 percent of Oak Helm contract sales in effect at the end of 2000 were in poor or very poor condition, based on ratings by the city assessor.

(For perspective, 55.1 percent of Oak Helm contract sales were in census tracts with a "high incidence of substandard housing." This is based on a 1998 "windshield" survey in which city staff looked at 7,234 homes, between 49 and 376 in each census tract. Tracts with a "high incidence of substandard housing" are those in which 10 percent or more of homes were labeled "poor" or "dilapidated." Seven of the city's 27 tracts fell into this category.)

Coon, again, questioned the city's methodology without disputing the general finding. She said Oak Helm spent more than $400,000 in materials and $800,000 in labor - all private money - on repairs while adding that the company needs to do a better job.

But, she said, Oak Helm is one of the few companies that finances homes in lower-income areas. She wondered whether the city is trying to scare off investment in its central-city neighborhoods. Nonetheless, she said, if the city implements its recommendations, they will not affect the amount of business Oak Helm does in lower-income areas.

First Financial

While Oak Helm says it wants to work with the city, First Financial presents a tougher case. The company's owners, Dan Lubell and Richard Vesole, hired Victory Enterprises to speak for them. (A call to Lubell for this story was referred to Grubbs.) And the company's history shows an interest in blocking contract-sale regulation.

Lubell requested that State Representative Jamie Van Fossen introduce legislation to forbid local governments from requiring inspections of contract-sale properties. That bill, House File 497, sits in the House's Local Government subcommittee. (One of the city's recommendations is for the city council to oppose the legislation.)

Grubbs said that First Financial is no longer pushing for passage of House File 497.

First Financial has also worked with the city to ensure that its contracts are not considered rental properties by the Davenport legal department.

In a 1996 case involving the city and K. Earl Lubell, Seventh Judicial District Magistrate J.E. Tobey III ruled that a real-estate contract "is no more than a sophisticated rental or lease with option to buy": "It specifically uses the term 'lease' and 'sublet.' ... It authorizes the first-party right of entry for inspection; the right to depreciate; the disallowance of interest deduction by second party; the contingent right of purchase; the allowance of a three-day notice to cure or quit; and the key words ... 'the right to occupy'" - all characteristics of leases. That decision was affirmed by District Associate Judge Gary D. McKenrick.

K. Earl Lubell had sued the city because it charged him $10 for a rental license for a property he was selling on contract. While the case does not specifically involve First Financial, Lubell appeared with Vesole, according to court records.

As a result of that decision, First Financial revised its contracts, removing or changing the language cited by the magistrate. According to Davenport staff attorney Brian Heyer, First Financial now submits its contracts to the city legal department. If the contract is considered a lease by the city instead of a sale, it is sent back to First Financial, Heyer said. He added that he did not know how many contracts the city has rejected because it considered them leases.

In a July 1999 letter to Vesole responding to contract language submitted by First Financial, Heyer wrote, "The agreement appears acceptable and the city would recognize it as a real-estate contract as opposed to a lease."

But if First Financial has removed troublesome language and provisions from its contracts - such as the word "lease" or the right to inspect the property - the financial terms of its contracts still seem to be closer to rental agreements than purchases.

One of the more startling components of the city's report was the figure that the typical First Financial contract would take 180 years to pay off if refinanced at its original terms. And according to the city report, two-thirds (14 of 21) of 1997 First Financial contract buyers defaulted on their contracts by 1999.

Grubbs disputed those figures, though. He said 1997 was First Financial's worst year for forfeitures. He said that between 1995 and 2001, only 43 (31 percent) of First Financial's 138 contract sales have resulted in forfeiture. Further, he said that 28 contracts (20 percent) have been paid off.

Hoover said 1997 was chosen for practical reasons. "It was the first class for which we had data that also covered the first [two-year] balloon periods," he said. He said it was "luck of the draw" that it happened to be First Financial's worst year for forfeitures. In an earlier interview, Hoover said, "Staff has tried to look at this in a dispassionate way."

The issue of contract terms is a little more complex. First Financial's contracts do not include a set interest rate. Instead, they apply a certain amount of the monthly payment to principal. Over the course of the contract, as the principal decreases, the interest rate actually goes up.

Grubbs said that First Financial's "equivalent" interest rate is between 10 and 11 percent. He provided one example in which the borrower makes monthly payments on principal and interest of $828 on a loan balance of $90,895. Over the course of a year, the borrower pays $516 on the principal and $9,420 in interest. That works out to an "equivalent" interest rate of 10.42 percent.

The city's assumption in its report was that contracts were renewed at their original terms. Grubbs said this is unfair. He said that in the past two years, First Financial has, when refinancing properties, increased the amount of monthly payments going toward the principal of the loan. He argued that if a borrower were to refinance the loan every two years when the balloon payment comes due, that person would own the home in 30 years, not 180, because the amount applied to principle increases with each refinancing.

But according to contracts on file with the city, that characterization is not accurate. An August 30 listing from Hoover of "land sales contracts of First Financial Group, LC, and related parties that are on file with this [Housing & Neighborhood Development] division" features 22 that were renegotiated and included information such as monthly payment and amount applied to principal. Of those 22, the amount applied to principal stayed the same in 14 contracts, decreased in one contract, and increased in seven. In other words, slightly less than one-third of the renegotiated contracts, all of them in the past two years, increased the amount applied to the principal. The increased amount applied to principal ranged from five cents per month to more than $15, but six were $3 or less per month.

Furthermore, monthly payments and purchase prices were typically higher in the renegotiated contracts than in the originals. Of the seven in which the amount applied to principal increased, the monthly payment increased in five, and two included higher purchase prices. In one case, the amount applied to principal rose $2 a month upon renewal, while the monthly payment jumped $8 a month. In another, the amount applied to principal grew $15.88 a month, but the monthly payment went up $3 a month and the purchase price grew by $6,060 - more than 13 percent.

Grubbs said that Hoover's list is probably incomplete. In 2000 and 2001, he said, First Financial has renegotiated at least 15 contracts in which the amount applied to the loan principal increased.

First Financial also provided one example of a June 2001 contract renewal not included on the city's list. The amount applied to principal rose from $37 a month to $45 a month, but the monthly payment amount also grew: from $870 to $895. So the monthly payment grew $25 while the amount applied to principal increased only $8 a month.

Grubbs claimed that First Financial provides its buyers with payment schedules showing the amount applied to principal increasing with each financing. But he conceded that this schedule is not binding.

What's binding is the contract, and if a buyer goes to refinance a contract when the balloon payment is due and is turned down by a bank, that buyer will return to First Financial or another subprime lender. (Grubbs said that approximately half of First Financial buyers refinance their contracts with a bank, and half use First Financial or another subprime lender.)

Based on data provided to the city, First Financial's claim of increasing the amount applied to principal in nearly all cases rings hollow.


Last week, the city council's Economic Development Committee moved forward on four recommendations to help deal with the issue of contract sales. All basically involve encouraging the state to increase regulation and consumer protections. Those will be before the city council on Wednesday.

A fifth recommendation, one that would require point-of-sale inspections for contract sales by Oak Helm, First Financial, and other companies doing five or more contract sales in a year, was held back in committee. There are differing opinions on whether inspections will do much good and how best to conduct them, and it is clearly the most controversial of the city recommendations. At the earliest, inspections will be considered by the city council at its September 19 meeting.

While the city staff would approach the problem by requiring inspections for contract sales done by certain higher-volume sellers, some people concerned about the problem of contract sales favor a different tact. Ward 5 Alderman Wayne Hean favors state or local legislation that "defines a legitimate contract sale and separates it from a sham contract sale that is designed to avoid rental inspections." In other words, Hean favors using certain criteria - such as amount applied to principal and the date of the balloon payment - to define rental property instead of requiring inspections for contract sales.

But whatever the approach, it's clear that inspections will be only a first step toward solving the problem.

You can read the second part of this story, about possible solutions to contract-sales probelms, online at (

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