Home Buying, Home Selling, and the Credit Crunch -- Working Toward Solutions

Among the many issues currently affecting real estate markets around the country today, one of the most obvious is tightened credit requirements for homebuyers.  While I actually support this new, more sensible approach to lending, which requires buyers to actually be qualified and have an ability to repay before they take on a mortgage, it certainly makes it tough for those who need to buy a home, but have to sell another home first, or who have the credit and income, but don't have the downpayment necessary to make it happen.

Of course I'm not talking about high-risk borrowers or your average sub-prime ARM / scam target here.  Hopefully that lesson has been learned.  I'm talking about someone with a real job and verifiable income, but who doesn't exactly have 20% lying around to plunk down to buy a reasonably-priced home.  I mean let's face it, even on a $200,000 home (about the average in my market), for many, 40K is a large "lump of dough" to plop down at one time!

Without getting into the variety of loan programs available that do allow for lower downpayments and PMI avoiding combo loans, the fact remains that availability and accessibility to home loans is currently greatly reduced.  I remember commenting recently (somewhere on someone's blog?) to the effect that in a progressive, capitalist and entrepreneurial economy such as we have here in the US, creative minds would undoubtedly not only figure out new ways to provide financing, but would find ways to benefit from the current market changes.

One direction market conditions and tightened lending requirements is taking us of course, is in a "return" to seller financing.  With interest rates still relatively low, sellers with large amounts of equity or who aren't financially strapped themselves, can easily turn the existing downturn into an upside by either owner-financing the whole sale (risky), or by carrying back part of the loan (less risky) as a second, and creating investment income.  While this is a rather obvious solution, of which I think most us are aware (along with lease-purchase and lease-option "sales"), it is one that is perhaps not used as often as it could be.  Another area likely to see a resurgence is loans between family members.

However, I think many sellers (and buyers) are leery of entering these "personal" deals, either through a fear of the unknown and lack of familiarity with how to handle problems that arise, or, out of a distaste for the "hassle" of managing the routine details of paperwork, collecting and tracking payments, follow up, and so on.  But, the entrepreneurial spirit I mentioned above is hard at work, and already two business operations spring to the fore as worth a look at as possible problem solvers (note I said "possible" -- alas, I bring you no silver bullet).

One such operation is now under the guiding hand of none other than Richard Branson (heard of him?), and supposedly takes some of the headache out of this process.  Virgin Money personal loan management (formerly CircleLending) facilitates as much of the transactional detail as needed (variable fee based) for both personal, business, and real estate loans from private party lenders, including documentation, billing, and collections.

One aspect of this site that particularly appeals to me is how they deal with loans from family members.  By making it a systemized 3rd party "business" operation, it seems this often overlooked or even avoided--yet very viable--source of funds, might become a little less "uncomfortable" to potential intra-family borrowers and lenders alike, and therefore be an opportunity utilized a little more.

Another interesting site, but one perhaps less quite as adapted to residential real state at this point, is that of the Prosper.com online lending and borrowing community.  The premise of this operation--co-founded by Chris Larsen, founder and CEO of E-LOAN--is that potential borrowers can submit their borrowing "needs"" online, as low as $50, and willing "non-institutional" lenders bid on how much they would be willing to lend and at what interest rate (which they determine by reviewing the borrowers credit "grade" and income).  Individual investor-lenders essentially then compete to "bid-down" interest rates to win the loan.  Prosper.com charges a percentage transaction fee for their service. Since the maximum loan is $25,000 and interest rates aren't yet competitive with mortgage rates, this isn't a solution for someone who can't qualify for a home loan at all . . .

But for me, the premise is fascinating, and one which I believe could ultimately expand to impact real estate financing in some form (and not just in the LendingTree sense of big lenders competing for a mortgage online, but actually allowing smaller private investors into the home loan game).  It is also likely to offer more competitive rates as more small investors come on board and vie for a return on their money.

So, where is the opportunity with Prosper?  In my opinion, some of the possibilities are:

1. A quick and easy (if somewhat expensive) way of coming up with a small part of a downpayment or closing costs (at least that portion allowed by the lender), particularly where there is a minor shortfall that could hold up financing or closing;
2. Obtaining a small loan for necessary home repairs or upgrades to make a home more saleable;
3. Using loan proceeds to pay off higher interest loans such as credit card debt, of for loan consolidation, helping buyers improve credit score and restructure debt in a more favorable way;

Of course, the above all have standard caveats attached as to responsible borrowing, keeping the lender informed as to the source of funds (even if obtained last minute), and refinancing or repaying any loan at the earliest opportunity--such as through a sale or refinance--to reduce the higher rate.

It's not enough to go around lamenting the current state of affairs.  There are solutions to be had.  But, without some creative thinking and careful guidance to those who need it, there aren't likely to be any significant inroads.  By finding ways to help buyers buy and sellers sell, we can possibly effect the change that is needed to jump start the real estate market . . . and rebuild the economy it supports.  I am not saying by any means that the above is the solution.  It is just an example of alternate ways we can look at the problem, to start finding "the solution".

Would love feedback and comments from anyone that has used Prosper.com or VirginMoney, to share with others how efficient and effective they are, or with insight on this new era of lending practices.