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Tuesday, June 10, 2008

Housing: Buy and Bail

by Calculated Risk on 6/10/2008 11:04:00 PM

From the WSJ: Some Buy a New Home to Bail on the Old

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine ...

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae.
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.
So far there are only a few anecdotal reports of "buy and bail", so this might be much ado about nothing. This is certainly fraud (if they sign a false loan document). But just like fraud for housing (when people lie about their income to buy a home), this type of fraud is almost never prosecuted - and extremely difficult to prove, unless someone tells a reporter what they're going to do.