June 10, 2008
The Newest Ploy: Buy and Bail
A few months back, I pondered whether is was better to walk away from a house that is well under water. Yes, it will be a hit to your credit score but the other option may be to keep paying a mortgage where the house that it is tied to will never gain back to the loan’s full amount. The biggest risk I saw was that if you were going to walk away, you may never be able to fulfill that American dream again of owning a home, particularly in today’s tight lending standards.
Well, some folks are now first buying and then bailing on their underwater home. Somewhat like having your cake and eating it too. According to this article in the Wall St. Journal, a loophole in lending rules allow people to take on a new mortgage while their current home is on the market or they make a promise to rent it. Lenders have provided new mortgages for the 2nd home bought in this down market and when the homeowner has this in the bag, they just walk away from the first, underwater home. So much for the notion of selling or renting it.
The practice isn’t widespread. In states like California, the way mortgages are structured so that lenders cannot come after the forclosing homeowners other assets. Ahhh - even more reason to buy and bail. But, tougher lending requirements are making it harder and this may even be considered fraud. So, while this may seem to be a good strategy if you are well below the water’s surface, think twice.
San Mateo Home Sellers in Trouble said:
I don’t understand why people would want to sink their money into a second house if they were already burned by a first home purchase. Unless they can get substantial financial gain out of it, I don’t see a point in doing this at all.
June 11, 2008 1:32 AM
peninsula renter said:
They do it because they might owe $500k on their current house, for example, and they can buy an equivalent home today for say maybe $400k. If you had 2 identical homes, in the same neighborhood, and you could have a mortgage… which would you choose to owe? $400k or $500k? There may be some transaction cost to doing this, but if it’s less than $100k the person comes out ahead, right?
I honestly don’t know all the implications, but in a simplistic way, I think this is their thinking.
June 11, 2008 8:10 AM
dg said:
Yes, as peninsula renter said, it makes perfect sense. There are plenty of people in Brentwood, Sac, Modesto, etc. etc. who seemingly could do this and it would be a very good financial move. Heck, I would probably do it had I bought an overpriced property in a bad area. I don’t have any sympathy for banks.
June 12, 2008 10:09 PM
Michelle said:
I am somebody that has a mortgage and nice house and wants to buy a cheaper house now… I am looking for a new house with a lot where we can build, vs the current house which was turnkey when we bought. Our existing mortgage is 640K, and the new house purchase price is going to be less, so I could look like one of these “buy and bail” scenarios, so my lender went over this with me.
At this point I am pretty fed up with this hysteria though. The buy and bail article mentions somebody in sacramento who was underwater 200K. In my case, my house is worth 900K, if I bought and bailed, I would lose 270K equity. In fact the median price of homes in the bay area has held remarkably through this downturn so to jump to these conclusions for somebody buying in SAN JOSE is really a stretch. Furthermore, doing something like this would destroy your credit!
All kinds of stuff is going on in Sacramento which everyone could see was a freight train crash in slow motion up there. But what does that have to do with San Jose, nothing. If the Real estate industry wants to get over this crisis they are going to need some common sense.
Here was my lenders email forwarded that the bank sent to all the loan officers:
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When confronted with this scenario, underwriters should apply good judgment and ascribe the following as loose guidelines (i.e.; not solid “rules”):
*Borrowers should have a minimum of 20% equity in their existing property,
*zero mortgage lates
*demonstrate a capacity to repay and have been meeting current obligations
*they should be putting at least 20% down on the new purchase….
EXTREME caution is urged if confirmed the current residence was recently for sale. (Google the street address. You’ll be surprised by what you may find!)
No leaps of faith on those deals.
June 13, 2008 8:09 AM