Dishonorable New Exit Strategy For Desperate Homeowners
| September 10, 2008 | Posted by Roshawn Watson under Uncategorized |
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By: Roshawn Watson
Some distressed, overextended homeowners are partaking in a disturbing “new exit strategy.” It is called the “buy and bail.” Borrowers with good credit purchase a new home – typically at a lower “bargain” price – and simply walk away from the first house, allowing it to go into foreclosure.
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Is “Buy and Bail” Right
Make no mistake, buy and bail is considered mortgage fraud. Often, the perpetrators will purport their intention as securing rental income from their current residence and downsizing to a newer more affordable home.
In many cases, it involves sending the lenders phony rental agreements (non-existent tenants) with the loan applications for the new houses. Often, the mortgage documents for the new loans are falsified. Borrowers deliberately withhold their true intent to stop making payments as soon as they move into the the home. In other scenarios, borrowers in a strong credit and cash position can simply just qualify for the second loan.
Despite the fact that I am very empathetic to the plight of homeowners are in over their heads, this practice is still disgusting. This deliberate deception exemplifies the desperation and lack of financial integrity in the current real estate market.
Lender Reaction
It is true that some justify this practice because their lenders did not appropriately explain the financing terms (ARMs, balloons, interest-only, etc) or their real estate agent misled them about the prices. However, ignorance and deliberate greed (wanting way too much house) by borrowers are not good excuses either. There is some level of culpability for all involved parties.
Not only are lenders condemning the practice, but Fannie Mae has already began imposing stricter criteria for approving second mortgages, and other lenders are expected to follow. One such change is Fannie Mae requiring that borrowers qualify for mortgages on both loans unless the existing home has at least 30% equity. Despite tougher regulations, it is still difficult for lenders to prevent someone from committing intentional fraud.
Not Getting Away Scot Free
Ethics aside, this strategy has other drawbacks. In addition to the resulting foreclosure trashing borrowers credit for almost the next decade, the legal ramifications are equally scary.
In many states, the lenders for the original mortgage can sue borrowers for assets, including the new house. When they win a judgment against borrowers (remember the lenders have a signed contract saying that the borrowers will pay X dollars for X years), the get out of jail free card quickly dissipates.
In these cases, the borrowers will still be on the hook for the remaining balance on their previous residence. Remember, many of these borrowers are people who initially had good credit and some had a good income. Many will not be judgment proof, and their assets will have to stand good for the defaulted loans. Additionally, borrowers could be in more trouble if lenders can show that homeowners committed fraud by misrepresenting themselves on their loan application.
Legal considerations aside, it really boils down to conscience. Lenders should definitely work with borrowers to come up with reasonable terms for the loans AND borrowers should ethically search for legal remedies for their current mortgage difficulties. However, deliberate deception and fraudulent practices, regardless of who is the perpetrator, is just plain wrong.
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