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"Home-Debtors" Continue to Buy and Bail

Written By Brian Hicks

Posted August 10, 2010



Here’s a new take on a story that I wrote about two years ago.

Apparently, some “homeowners” are still dumping their wildly overpriced homes and are picking up the half priced deals that are just down the street.

Despite the best efforts of Fannie and Freddie to end this game, “buy and bail” still lives…

From Bloomberg by Kathleen M. Howley entitled: “Buy and Bail” Homeowners Get Past Loan Restrictions

Harvey Collier, a mortgage broker in Fort Lauderdale, Florida, says he gets as many as 10 calls a month from people planning to default on their loans. The twist: They first want financing to buy another home.

Real estate professionals call it “buy and bail,” acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s “underwater,” or worth less than the mortgage. It’s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.

The practice, which constitutes fraud if borrowers lie on loan applications, is continuing even after Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, beefed up standards to prevent it, according to brokers such as Collier and Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency. Whether driven by greed or desperation, the persistency of buy and bail underscores the lingering impact of the worst housing crash since the Great Depression.

People were holding on, hoping the market would turn around,” Collier, who won’t work with applicants who intend to go into foreclosure, said in a telephone interview. “But now they’re giving up because there’s no light at the end of the tunnel in places like Florida.”

About 12 percent of residential-loan defaults in February were strategic, meaning homeowners decided not to make payments even though they could afford to, New York-based Morgan Stanley said in an April 29 report. The rate, which was about 4 percent in mid-2007, probably will increase even if home values start to recover, said Frank Pallotta, managing partner of Loan Value Group, a mortgage-consulting firm in Rumson, New Jersey.

After home prices bottom, the borrower in a position of negative equity is able to quantify exactly how long it will take to recoup the loss, and may decide to walk away,” Pallotta said.

Clients of Ron Wilczek, a real estate broker in Tempe, Arizona, two months ago bought a house near Phoenix even though they couldn’t sell their existing property because its value had sunk so far below its mortgage.

Now settled in their new residence, they may try to sell the first home for less than what they owe, said Wilczek, owner of Metro Phoenix Homes. If the lender won’t agree to a short sale, they may just stop making payments, he said.

You can make the argument that you must honor your commitments no matter what,” Wilczek said. “On the other hand, you have people who are realizing that if they want any hope of a retirement or a better life for their families, they can’t keep paying for something that will never, at least in their lifetimes, regain its value.”


Here is the funny thing about people. When given the choice between being poor and living comfortably, they always seem to choose comfort for some reason.

Go figure.

Related Articles:

“Homeowners” Buy and Bail

Used Home Sales at a 3-Month Low

Trulia: The Sellers Are on the Run

Meredith Whitney Predicts a Housing Double-Dip

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