The question is how should BlueHub be regulated to ensure consumers are adequately protected. A provision in the economic development bill that Governor Maura Healey signed Wednesday aims to create a new regulatory structure to govern these mortgages. With litigation pending over BlueHub’s business model, the Legislature is right to try to clarify the rules.
Given Massachusetts’ housing challenges, BlueHub performs a valuable service. But people entering these mortgages need to understand what they are agreeing to.
For homeowners facing foreclosure, BlueHub Capital offers a unique model for staving off foreclosure. The nonprofit lets residents stay in their homes — but with mortgage terms so unfavorable that someone with an alternative likely wouldn’t agree to them.
But the language goes too far in exempting BlueHub mortgages from state consumer protection and mortgage laws.
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It’s telling that Attorney General Andrea Campbell had “serious consumer protection concerns” about the proposal because it would weaken her regulatory authority. After the bill was signed, Campbell said she will draft regulations to protect consumers “to the maximum extent provided for under the new law.” But, Campbell said, “I remain concerned about the precedent set when a particular product is exempted from our consumer protection laws — which are the strongest in the country. We cannot let this become the playbook for industries that want the same treatment.”
Campbell should use her regulatory authority to ensure consumers are properly protected. And lawmakers should be open to changing the law they just passed if it becomes clear that more consumer protections are needed.
The issue has political overtones because BlueHub Capital CEO Elyse Cherry is a prolific donor to state Democrats including Healey. Healey told a Globe reporter that she didn’t talk to Cherry about the issue, which was added into the bill by the Legislature, not by Healey.
But the issue isn’t about one person or even one nonprofit. BlueHub is the only organization offering shared appreciation mortgages in Massachusetts today, but companies in other states have offered other types of similar arrangements — such as providing cash in exchange for equity in a home. BlueHub may be well-intentioned, but the next company that offers shared appreciation mortgages might not be — which is why maintaining consumer protections is vital.
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The way BlueHub operates is by accepting clients in default or foreclosure, who often owe more than their home’s value. BlueHub negotiates with the bank to buy the home at a lower price than the mortgage balance, then sells the home back to the homeowner, for a profit. The homeowner can stay in the house with a lower mortgage than they had previously, though BlueHub’s interest rates are often above market rate. BlueHub also executes a shared appreciation mortgage, which means if the home increases in value, BlueHub gets a share of the increase (on average 37 percent, according to BlueHub). If a homeowner sells, refinances, or pays off their 30-year mortgage, they must pay BlueHub for that equity.
To be sure, BlueHub is taking a risk in lending to low-income clients in foreclosure who couldn’t get a loan on the commercial market, and BlueHub needs a way to ensure the loans are repaid. According to BlueHub, the organization has made 568 loans to Massachusetts families, many in Boston, Brockton, Lynn, and Springfield. The average homeowner saves $734 a month on mortgage payments and has their principal reduced by $91,000, according to BlueHub. More than 400 families have exited the program — mainly by refinancing — with an average of $150,000 in home equity, according to BlueHub.
“Virtually everyone who’s gone through the process, every single one of them is way better off,” Cherry said.
Healey, after signing the bill, said she sees it as a way to help people at risk of losing their homes refinance and stay in their homes.
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Rose Webster-Smith had been fighting post-foreclosure eviction for five years when BlueHub bought her Springfield home from the bank and sold it back to her. The sale reduced her mortgage payments by $400 a month. As the head of an organization that fights for homeowners’ rights, she credits BlueHub for letting her keep her home. She understands BlueHub has equity in her home and believes she can pay it off when she sells.
Yet many clients are less satisfied. Anthony and Margaret Oates, who own a two-family house in Dorchester, are married with three adult children at home. Anthony, retired from the Boston School Department, was driving for Uber and Lyft and Margaret had been laid off from her job at an insurance company when they entered bankruptcy in 2011 and their home was foreclosed on, according to a complaint filed in a lawsuit against BlueHub. BlueHub bought their home from the bank for $144,900 and sold it back to the Oates’ for $192,000. The family knew they were accepting a 30-year mortgage with a 6.375 percent interest rate, above market rates at the time. They didn’t understand that BlueHub would own 54 percent of any appreciation of their home’s value. When they tried to refinance six years later, to lower their interest rate and extract money for home repairs, they were told they couldn’t unless they paid off BlueHub’s share of $140,000 in appreciation.
A lawsuit pending in Suffolk Superior Court argues that BlueHub’s loans violate state consumer protection laws and other laws governing loans. Transactions are “rife with conflicts” and financing practices are “unconscionable and oppressive,” the suit argues. A judge is weighing motions for summary judgment.
The language in the economic development bill will impose guardrails on shared appreciation mortgages: limiting them to homeowners who are at least 90 days delinquent; only allowing them when the new mortgage reduces a homeowner’s mortgage loan principal; and requiring written disclosure of terms. Cherry said BlueHub already adheres to all these practices.
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Critics — including organizations representing both bankers and consumers — question whether these guardrails go far enough. For example, the disclosure form would encourage recipients to talk to a housing counselor but would not mandate counseling. Other high-cost mortgage products require borrowers to receive counseling.
Most concerning is the blanket exemption of shared appreciation mortgages from liability under state consumer protection and lending laws. What impact the language would have on the current lawsuit is unclear, but it would preclude future lawsuits. Jeffrey Wiesner, an attorney for consumers suing BlueHub, called it “absolutely extraordinary” to have legislation that “gives one entity in the commonwealth immunity from consumer protection laws in general and those that have been specifically written to cover mortgage financing.”
Cherry said all BlueHub wants is to codify existing practice. The company maintains that it is complying with all applicable laws. But in light of the lawsuit and complaints that have been made to state regulators, Cherry said it’s evident that “the law’s not as clear as it needs to be.” The exemption, she said, allows BlueHub to operate “without having to worry about whether every time you make a mortgage someone will take action.”
But fear of litigation isn’t a good reason to make policy. As Andrew Pizor, senior attorney at the National Consumer Law Center, put it, “People need a right to say ‘you cheated me.’ ” Shared appreciation mortgages have a place, but the potential for some unscrupulous operator to harm homeowners with them is too great for state government to let down its guard.
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Editorials represent the views of the Boston Globe Editorial Board. Follow us @GlobeOpinion.
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