Buy and Bail Desperate Measures

Some homeowners opt to ‘buy and bail’NEW YORK – June 17, 2008 – Some borrowers struggling to pay their mortgage and dealing with big drops in property values are avoiding their problems by committing what some call fraud – and others call smart.These owners are using their good credit rating to buy a second home at a lower price, assuring the lender they’ll rent out their first home. But what they really end up doing is walking away from the first home, leaving the lender holding the bag.Lenders call the phenomena “buy and bail.”In some cases, real-estate practitioners and brokers who see nothing wrong with it coach homeowners through the buy-and-bail process. Some blame the phenomenon in part on lenders’ unwillingness to cut deals or restructure loans made when home prices were inflated.“It’s just a business decision,” says Linda Caoili, a Sacramento real-estate practitioner. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”The trend may be short-lived. Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences. The guidelines will make an exception only for borrowers who have at least 30 percent equity in their current home.Of course, some individuals still can qualify for that second loan because of a strong credit and cash position.Source: The Wall Street Journal, Nick Timiraos (06/11/08)