It’s Getting Harder to ‘Buy and Bail’
Homeowners who are upside-down on overpriced properties bought at the height of the market are finding creative ways to unburden themselves, according to this excellent article by Leslie Berkman, reporter for The Press-Enterprise, based in Riverside. One is the “buy and bail” scam:
The abusers are homeowners who could afford their mortgage payments but didn’t want to keep a house whose value had dropped below what was owed on it.
If they just walked away, their shattered credit would prevent them from buying again. Instead they continued making timely payments on the first home. On the loan application, they led the lender to believe they intended to put a tenant in the first house so they could afford the two mortgages. But once escrow closed on the new house’s purchase, they stopped making payments on the first house, letting it go into foreclosure.
Fannie Mae and Freddie Mac have gotten wise to this practice. Last month, Fannie put into place new guidelines designed to stop buying and bailing, and Freddie is expected to follow suit.
Under the new Fannie Mae guidelines, in most cases, a borrower now must have at least 30 percent equity in his house to buy another. Otherwise, he cannot use the rent he says he will get to prove he can support two homes. The deterrence is that no one would want to walk away from a house in which he had a large amount of equity.
Also, the rental income the borrower claims now must be fully documented.
Homeowners who think the only thing they stand to lose is their credit rating might be surprised to know that “buying and bailing” is a form of fraud.
A borrower who takes part in one of these scams can be sued by the lender or criminally prosecuted. The real estate agent involved can be prosecuted and lose his or her license.
And a lender who discovers he has been bamboozled into approving a loan with phony information can require the agent or borrower to pay off the mortgage immediately.
Prosecutors have been reluctant to pursue such cases, the story says, preferring to concentrate on con artists who prey on people facing foreclosure than people who dupe lenders.
Joe Cusamano, broker/owner of Pro-One Investments in Riverside and president-elect of the Inland Valley Association of Realtors, said he knows he has clients who have lied to lenders to “buy and bail” and done short sales between parents and children.
He said he tells them what the law requires but still works with them because he believes they are good people caught in a collapsing market who are not getting sufficient help from either lenders or the federal government.
The housing slump has created hardship for many people, but it’s tough to muster up sympathy for people who get new homes by deceiving lenders and then abandoning their old homes.
On the other hand, it’s hard to feel sorry for the lenders who stupidly doled out exotic, low- or no-down mortgages. Those lenders made thousands on every client. As a result, the “buyers,” who put little or none of their own money into the transaction, have little incentive to stay put.
Recent Redfin posts:
The Irvine Market Report: Detached Home Stats, August 2008
Villa Park Turns Big Brother…I Say ‘Good!”
Home Values Only Down 10%? I Don’t Think So!
