My point is this: Think twice before you commit to something that you will regret later.
Q: After living in a neighborhood he loathes, Joe bought another home and is walking away from his old home. Is this considered mortgage fraud?
A: Joe, a local homeowner, called to tell me that he purchased his home in Sparks without doing much research about the neighborhood. He was retiring from the Army and wanted a small home near his family in an older part of Sparks. His neighborhood turned out to be less than neighborly. He laid awake listening to gunshots and loud fighting on most nights and weekends. The screaming police sirens were not music to his ears. He was beginning to lose sleep at night and his temper during the day. More and more Joe felt like a prisoner in his own home. After two short years of this, Joe bought another home in a nicer neighborhood and walked away from his old home that he simply hated. Is this mortgage fraud?
To answer the question: Yes, this is mortgage fraud — namely the “buy and bail.” Read on.
Q: What is buy and bail?
A: This scenario is commonly known as buy and bail, where a homeowner buys a new home with the intention of bailing on the old home. This is considered mortgage fraud. Even extenuating circumstances do not allow the homeowner the right to commit mortgage fraud.
More and more homeowners are turning to the strategy of buying a new house at a lower price and then walking away from their underwater home. More than 14 million homeowners are now underwater with a projection that the number will grow to 20 million by the end of 2011; desperation has set in.
This type of mortgage fraud was very common from 2007 through 2009. Many homeowners bought a home at a lower sale price and walked away from the financial responsibility of their old homes that they could not afford. It was easier to qualify for multiple loans at that time. In more recent years, lenders have begun advising homeowners against buy and bail. It has become a company policy to counsel homeowners against such scams. In fact, when a homeowner goes to a lender to inquire about taking out a new loan while their current home is listed for sale, they are faced with very strict loan qualification guidelines. Typically the lender will not loan to a homeowner who is contemplating buy and bail. Homeowners cannot qualify for a new loan unless they have 30 percent equity in their current home.
It is best to first short sell a home that you are no longer financially able to keep. Check into a HAFA short sale and its corresponding 100 percent debt forgiveness as well as the Mortgage Debt Forgiveness Act. HAFA short sale pays the homeowner $3,000 for move-out incentive. Then, after the customary two- or three-year waiting period, they will be able to buy another home at an affordable price with a fixed interest rate.
Q: How can I tell if it is a buy and bail?
A: Buy and bail involves lying. The homeowner typically provides a phony rental agreement to a lender to justify that the rents will pay for the monthly mortgage. Once his debt ratio is lowered by showing the rental agreement, the homeowner is free to take on another home loan debt. However, shortly after moving into the new home, the homeowner usually loses the renter and is unable to keep the old home. Next, the homeowner is forced into short selling or foreclosing on his old home and the lender on the old home is out thousands of dollars in mortgage interest. A foreclosed home also lowers the value of the neighborhood and delays recovery of the housing market. In order for the old home to be sold, the lender will have to bear the costs of repairs, back property tax, back HOA dues, back hazard insurance premiums, back sewer and trash dues and the cost of an agent to sell the home. So, buying and bailing costs the lender a great deal of money and it also greatly reduces the overall neighborhood home values.
Tune in next week when I will be exploring another type of mortgage fraud.
Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is www.anniechristian.com.