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Seller Financing: Exploiting Vulnerable Homebuyers

solomon succes logo and photoFor King Solomon, who prized wisdom, prudence and just dealing above all other virtues, behaving honorably in dealing with others was important, creating a good reputation and earning the grace of God. These qualities create the foundation for a modern-day investing career, too.

But unscrupulous and manipulative practices still thrive, and the prudent investor is wise to take note of them. One such practice is seller financing for home purchases, which echoes the exploitative and in some cases downright fraudulent subprime mortgage lending that led to the housing collapse of a few years ago. Targeting the same vulnerable home buyers as the first round, this new kind of “subprime” lending threatens to create a new round of foreclosures in some markets.

Before the housing crisis of 2008 or so, most people had never heard of a “subprime” mortgage. But as more and more homeowners were hit with suddenly ballooning payments and fell into foreclosure, this loan strategy made headlines. During the housing boom that preceded the crash lenders made loans available to virtually anybody –even those with iffy, or subprime, credit ratings and unstable employment histories. Many of these borrowers, eager for the opportunity to own a home, didn’t understand the terms of these loans, which provided initially low rates and payments that soon loomed much larger. The result? Missed payments, homeowners in crisis, and ultimately foreclosure on the home that had seemed so easy to buy.

After the collapse, mortgage lending came under greater scrutiny, and a flurry of suits, settlements and new regulations reined in the worst of the fraudulent practices and extravagant lending that had put so many homeowners into trouble. But although banks and other lenders in the industry put more stringent requirements in place, seller financing creates conditions for a new version of the old subprime mortgage, targeting those who lost homes in the first round and can’t qualify for a traditional mortgage under current conditions.

Generally, those homeowners bitten by the foreclosure crisis have been locked out of homeownership for at least a few years, but seller financing arrangements ignore poor credit and a foreclosure history. This isn’t a new phenomenon, of course, but since more and more third party companies are taking over the arrangements made between buyer and seller, the process is beginning to look a lot more like the old subprime lending.

Although traditional seller financing has been arranged between buyer and an individual seller, the new version involves a company that purchases foreclosed homes for low prices and then resells them to buyers with questionable credit. This process does get some buyers back into the housing game, but it comes at a cost: sky-high interest rates and severe penalties for missed payments.

These features have some industry observers concerned that the same homeowners at risk in the first subprime crisis may be facing a similar situation again in their rush to buy another property. Although this kind of lending probably won’t trigger a collapse similar to the original crisis, the potential for another round of foreclosures affecting homeowners from the first version may affect local markets and the investors following Jason Hartman’s guidelines for creating wealth through investment properties. (Top image: Flickr/modery)

The Solomon Success Team

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