Seller-financing of residential property is booming in the credit crisis. Due in part to tightened lending standards for traditional mortgages, low-income home buyers are being shut out of the mortgage market, and are turning to contract-for-deed or lease-to-own agreements to finance their home purchases. In Texas, the state legislature tried to curb abuses in the seller-financed housing market by enacting a mix of typical consumer protection laws: required disclosures, penalties for unfair practices, and a process for converting contracts for deed into mortgages. So why do so many abuses remain in seller-financed transactions, when the legislation checked all the consumer-friendly boxes?

This article examines the current contract for deed and lease-to-own system in Texas using real cases, and suggests a more expansive consumer protection analysis. In this unique sub-prime market, consumer protection legislation should continue to balance the playing field between buyers and sellers, but should also remove barriers that prevent a homebuyer from enjoying the same homestead rights and equity as buyers with traditional financing arrangements. Instead of putting the burden on homeowners to take complex steps to convert contracts for deed into mortgages, or lease-to-own contracts into purchase agreements, improved consumer protection legislation would make these conversions automatic. Clearer disclosure requirements and targeted penalties for failing to record contracts would also help low-income buyers achieve rights and protections similar to mortgagees. These changes would ensure a fairer system for low-income home buyers, who invest the same financial and emotional commitment in their homes as mortgage holders, but are excluded from the current market for bank credit.