You might have seen a segment on the “Buy and Bail” phenomenon last night on the national news. I did and was honestly appalled at how little these homeowners seemed to care about what they were doing. But as I was watching the story I was quick to notice that many of the lending loopholes that are allowing homeowners to use this scam have already been closed by Fannie Mae.
First, let me explain the “buy and bail”. Basically a homeowner knows that soon they will not be able to make their monthly mortgage payments. So before going in to foreclosure or even making one late payment, they go ahead and find a new home and submit a loan application. At that time they claim that they are going to rent their current home to cover that cost of that mortgage. They then buy the 2nd home, don’t rent their 1st home but rather make no payments on it and allow it to go in to foreclosure. Obviously their credit is shot for a few years but they still have a house, so who cares.
This whole idea truly makes me sick. And Fannie Mae and Freddie Mac have made changes to their lending practices to try and stop this. First, with a foreclosure on your credit you can not buy a house for 10 years, up from 5, and they will require 10% down from these borrowers. The idea is to hopefully make letting your home go into foreclosure more unattractive in the long term. But I don’t think these borrowers are really thinking long term.
As far as the short term, buy and bail, Fannie and Freddie have also made some changes to their lending. First, you must provide a fully executed rental agreement. Also, when applying for a 2nd home loan, you must qualify for both the first and second loan together unless you have 30% equity in your home. And if you have that much equity why would you be bothering with the buy and bail. I think this change in lending law will go a long way in stopping this phenomenon, people who can afford both mortgages are probably unlikely to default and those with 30% in their house would be more likely to sell than let their houses go into foreclosure.
It should also be noted that this “buy and bail” strategy is considered mortgage fraud. There seems to be some debate on this point but as far as I can tell, you are going to be lying on your loan application. And the FBI defines mortgage fraud as “any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” These borrowers are deliberately misleading their lender- case closed, in my opinion.
If you are stuck with a home loan that you can’t afford or that is about to balloon, please check with you lender or bank to see about restrcuturing. In Ohio you can also go to Save the Dream for help.