The Real Lender of Last Resort —
And Why It’s Due for a Comeback
Traditionally, the Federal Reserve holds the title of *“lender of last resort.” However, that’s only true if you are a troubled corporation with a $100 billion-plus balance sheet.
If you are Joe or Jane Home Buyer, the real lender of last resort is . . . your home seller.
Back to the Future?
Few people remember, but when long-term interest rates topped 14% in the early ’80’s, Seller financing became quite popular. Instead of getting a bank mortgage pegged to nosebleed levels, Buyers got mortgages at more affordable rates from their Sellers.
Done well, everyone came out ahead.
Buyers got their dream home at a “below-market” interest rate that they could actually afford. They also saved thousands in lender fees — origination, underwriting, application, processing, etc.
Meanwhile, Sellers also did well. They got a decent price for their home, a reasonable investment return on their money, and a ticket out of a house that might otherwise have languished in a slow market.
Ironically, the reason why Seller financing may be due for a comeback now is abysmally low interest rates.
Equity-rich home sellers today (yes, there are still plenty — see below) have never faced more nerve-racking choices about where to put their proceeds.
Want super-safe? The U.S. government will let you park your short-term money in T-bill’s if you pay it for the privilege (until the financial crisis abates, rates are effectively 0%).
Too low? There’s the commercial paper market, but then you have worry about whose balance sheet is going to blow up next. That’s an even bigger concern for corporate bonds with longer maturities.
Want to juice those returns a little bit? There’s always auction-rate securities (oops! That market collapsed after leaving thousands of investors trapped for almost a year).
Worried about the federal government taking on trillions in bad debt? You’d guess that commodities like oil and wheat, and currency hedges like gold, would be stellar performers — and would have lost from 20% to 50% of your money the last six months.
So how about the stock market? Yes, how about the stock market!
After seeing 30% of their money vaporize just since Summer — and the remainder gyrate wildly on a daily if not hourly basis — investors are understandably gun-shy about entrusting what’s left of their nest eggs to Wall Street.
In such a dismal investing environment, the best credit risk might very well be . . . that nice, young couple with two sweet kids who want to buy your home.
Thanks to technology, Sellers can easily access Buyers’ credit scores — and practically anything else they care to know about them.
Buyers can arrange their own appraisal, which, along with realtors’ comparative market analysis (“CMA”), serves to establish fair market value.
One-stop shopping real estate brokers and title companies will be more than happy to assist with the promissory note, mortgage, warranty deed transfer, etc. Who knows, with the advent of peer-to-peer lending (think of it as “eBay for loans”), it may even be possible to securitize, er, package, the resulting loans to investors in exchange for cash to Sellers, discounted to present value.
Which just leaves one, key ingredient: equity. For Seller financing to work, Sellers must own most or all of their home.
Guess what? Plenty do. Lost in today’s headlines about record foreclosures, short sales, subprime lending, etc. is the fact that one-third of all homeowners own their homes free and clear.
While the Federal Reserve and Treasury try to sort things out, such Sellers — and their Buyers — may very well decide to take matters into their own hands.
Next: the opposite of redlining? Greenlining!
*For those keeping score, the federal government has also assumed, to date, the mantle of “insurer of last resort,” “commercial paper buyer of last resort,” “auto lender of last resort,” “credit card issuer of last resort” . . .