May 20th, 2011 6:59 AM by Lehel S.
Sue and Douglas Reed knew no bank would give them a mortgage - not with a bankruptcy and two foreclosures fresh in their credit history.
They turned to Hilarie Walters, whose childhood home on 15 acres in Marshall, Mich., had been on the market since 2009. The unemployed single mother of twins agreed in December to sell the property to the Reeds for $105,000. She also consented to a risky payment plan that in effect makes her the couple's mortgage lender.
Financing provided by home sellers, popular in the 1980s when mortgage rates reached 18 percent, is making a comeback in markets such as Michigan that have been hit hard by foreclosures and where tightening lending standards and years of economic distress have drained the pool of creditworthy buyers. For a small but growing number of people, it's the only way to get a deal done.
"This is the American dream, and we're going for it no matter what," said Sue Reed, 56, who sells snacks from a trailer at estate auctions and going-out-of-business sales. "We'll either make it or it will break us."
Michigan, where unemployment is 10.3 percent, leads the nation with about 1,600 home listings advertising seller financing, according to Trulia Inc., a San Francisco real estate information company. It is followed by Florida, Ohio, California, Wisconsin, Minnesota and Texas.
Last year, 52,991 U.S. homes were purchased with various forms of owner financing, up 56 percent from 2008, said Realtors Property Resource LLC, a subsidiary of the National Association of Realtors, citing data collected from county record offices. Such deals accounted for 1.5 percent of all transactions in 2010.
"Anytime the market is in this much trouble, people have to find ways to get it to function," said Dennis Capozza, a professor of finance at the University of Michigan in Ann Arbor. Capozza has direct experience with seller financing: He purchased a friend's foreclosed home a couple years ago and allowed him to buy it back in installments.
Home sales, weighed down by a 9 percent national jobless rate and tight credit, have languished even as 30-year mortgage rates remain below 5 percent. Loans insured by the Federal Housing Administration carried an average FICO score of 703 in March, compared with 629 two years earlier, highlighting that lenders are requiring stronger credit histories. FICO scores range from 300, the least creditworthy, to 850 for the best borrowers.
"The market is locked up because there's no financing," said Gordon Albrecht, executive vice president of FCI Lender Services Inc., an Anaheim Hills firm that oversees mortgages for private investors. "This is moving houses."