A week ago, I wrote a column here about West Dallas landlord Khraish Khraish, whom two legal aid groups are suing for predatory practices. The lawsuit was new. I mentioned a legal issue in the suit that Khraish and his lawyer hadn’t had time yet to review fully. So now they have.
It’s being called a “snatch-back” clause by the people suing Khraish. It’s a clause in more than 100 home mortgage notes originated by Khraish saying he can “call the note” — demand full payment — at any time for any reason.
The homeowner, of course, has the right to seek a new mortgage from somebody else and pay Khraish off with the money. But we’re talking about poor people in the first place. Chances are, if the note gets called on them, they just lose the house.
“Demand provisions are sometimes used in seller-financed transactions, which allow the seller to call the note in the event of extraordinary circumstances." — John Carney
Isn’t that predatory? Why is it even in there?
Since my column ran, I have heard from people in the home-loan business telling me that without this kind of so-called “nervous clause,” no one would lend mortgage money to people like Khraish’s poor working tenants, very few of whom have the kind of credit required to get a mortgage. Deny lenders the right to insert a clause like that in high-risk mortgage notes, my correspondents told me, and nobody will lend money to poor people with weak credit.
Yeah, maybe. I wanted to hear a fuller explanation from Kraish and his lawyer John Carney. Now I have. I will share it with you here on one condition.
You and I understand that this is their version, their story. I am not warranting it here as the word from Mount Sinai. It’s their side of a lawsuit.
I did ask the other side, the legal aid groups, to comment on Kraish and Carney’s responses to their suit, but I did not do so until Wednesday morning, which is sort of ridiculously short notice. I am sure they will get back to me when they can.
Khraish has been selling his modest rental homes in West Dallas to his former tenants, turning his renters into homeowners and also conveniently transferring to their shoulders the obligation to keep the houses maintained. His dispute with City Hall followed the imposition of a new city building code for rental properties requiring better air-conditioning and many other basic infrastructure improvements.
The city — the mayor, in particular — had singled out Khraish as a problem landlord. But whenever the city took him to court, Khraish was always able to show that he kept his hundreds of rental properties in compliance with the law. The City Council decided that if current conditions in Dallas for poor renters were legal, we needed a new law, which is where the tougher rental code came from.
Under the new building code, Khraish faced potential fines as high as a million dollars a day if he failed to get his hundreds of houses into compliance. He decided most of his houses were too small and too old for that level of renovation to make business sense. The better move business-wise was to bulldoze and build new houses, but that would have required evicting hundreds of poor tenant families.
When the mayor and City Council caught wind of that possibility, they sort of went nuts, probably because Khraish was blaming the possible evictions on them. At the same time, big-time apartment and condo developers were gobbling up land all around Khraish's, and land prices were soaring. The mayor did not earn trust from Khraish when he leaned on Khraish to sell his land to certain developers.
Out of all of that came a truly radical and groundbreaking proposal by Khraish. Rather than evict his tenants and rather than sell his land to the mayor’s favored buyers, he would begin selling at least some of his properties to longtime tenants who had never missed a rent payment. They didn’t have regular credit with the banks downtown, but they had credit with Khraish.
And, yes, Khraish dodged the bullet on code enforcement. If city officials wanted to be on the 6 o’clock newscasts throwing 120 poor families out on the street because their houses had dodgy plumbing, they were welcome to do so. The city hasn’t made a peep about the code since Khraish sold.
And, yes, Khraish also continues to derive the same income from the same properties. He sold the houses to the tenants on such favorable terms that the average mortgage payment is roughly equivalent to the rent, as low as $600 a month. And Khraish financed the deals, which no bank would ever have done, so he gets the income from the notes.
But that’s all legal. Poor families that might otherwise have faced homelessness, got to stay in their houses. On one level, it’s hard to argue with what Khraish did. A national Hispanic civil rights group even gave him a commendation for his innovative work in preserving affordable housing. Top Democrats feted and warmly greeted him in Washington.
But the recently filed federal lawsuit argues with all of that. It takes a different tack, claiming Khraish is a predator who has exploited his tenants by creating a fake form of so-called ownership. One of the key issues is that clause that gives Khraish the right to demand full payment of his mortgage notes at any time.
Carney doesn’t call it a snatch-back clause. He calls it a “demand provision,” which sounds a little better. He says demand provisions are not uncommon when the lender is extending credit to somebody who really doesn’t have any credit as defined in common practice:
“Demand provisions are sometimes used in seller-financed transactions,” Carney tells me, “which allow the seller to call the note in the event of extraordinary circumstances that arise before an event of monetary default under the note or security instrument.
I can translate that for you. Drug dealers. It’s that simple. Carney puts it legalistically, but I know from talking to him and to Khraish for a couple of years what they’re talking about. Drug dealers.
Khraish and his father, a Lebanese immigrant who founded the company, winnowed down to a customer base of reliable renters in a tough part of town by doing it the Old World way: If you wanted to rent from the Khraishes, you couldn’t mail in your rent, and you definitely couldn’t pay it online. You had to bring it to the office on the due date so they could eyeball you.
If the transactions are fake, Khraish isn’t just fooling his buyers; he’s fooling everybody, and if anybody can prove that’s the case, then Khraish is in a whole bunch of trouble.
One day past the due date, and they went to your house. If you were sick or lost your job, they made an arrangement. But if there was a new BMW parked out front and your daughter’s new boyfriend came to the door drunk with a Glock in his waistband, you were gone, out, off the property, somewhere else, no longer a tenant.
The Khraishes own whole blocks of properties — little neighborhoods unto themselves. They know and respect poor working people. A big part of making their business work is making those little neighborhoods work. Sometimes it takes a resolute hand.
Carney says that’s what the so-called snatch-back is.
“In 10 years and more of renting to these people,” he tells me, “Khraish has never once gone up on their rent. How many other landlords in the city can say that? But he needs to have some reasonable control over the area around him, and that’s what this is.”
The rest of the legal answers he provided me all address two underlying accusations raised in the lawsuit. One is that the Khraish transactions are false sales, not fully legal transfers of title like what middle-class people get when they buy a house, but trick documents with which Khraish effectively maintains true ownership. The second is that Khraish told his buyers he was giving them fixed-rate mortgages at 4.75 percent interest over 20 years when in fact he can hike their interest rates to more than 18 percent.
Carney’s answer to the false sale argument is kind of a dare. The transactions are all registered with the county as special warranty deed and deed-of-trust transactions. If they’re fake, Khraish isn’t just fooling his buyers; he’s fooling everybody, and if anybody can prove that’s the case, then Khraish is in a whole bunch of trouble. Carney says the transactions are bulletproof.
The interest rate thing is above my head. Carney says the plaintiffs are conflating two issues — variable versus fixed-rate mortgages on the one hand, penalties for default on the other. I’ve always been very conflated on that. I think I’ll just leave that one to the courts.
Here is my journalistic take on all of it so far. The mayor came after Khraish for being a predatory landlord. Khraish fought back. Khraish won. The mayor tried to get him to sell his land. He didn’t.
The city attorney tried to get his properties confiscated. Khraish won in court. City code officials threatened to put him out of business. He’s in business.
A private attorney tried to organize a class-action suit against him. Khraish killed it. Former West Dallas City Council member Monica Alonzo lined up against him. She’s out of office.
This lawsuit? I’m not a bookie. Sadly.