Topics: lending, real estate
The current housing/mortgage/credit/energy/everything crisis is inspiring people to find creative solutions to overcoming their financial problems. The latest get unpoor quick scheme: swapping houses with negative equity for much cheaper ones. Even folks who are $100k or more underwater on their current mortgages can escape their crushing debt and still come out as homeowners. It’s so easy, even you can do it by following these simple steps:
- Sign a contract on a new house for cheap.
- Forge a rental agreement for your current house and use the “rental income” to help you get a mortgage for the new house.
- Move in to the new, reasonably-priced house.
- Default on the old mortgage and let the bank foreclose.
Some banks and government agencies are calling this “buy and bail” tactic fraud, usually pointing to step two which requires you to put your current house down as rental income. But since many mortgage lenders let you buy a new home before you sell the old one without a rental agreement in place (just the motivation to sell quickly so you’re not paying two mortgages), you may be able to bypass the fraud part of the scheme entirely. Those who’ve pulled it off successfully say there’s nothing fraudulent about it, possibly because it uses the banks’ own policies against them.
Because buy-and-bail is happening more and more frequently, government-sponsored underwriters like Fannie Mae are moving quickly to help clamp down on the practice. And even without new rules and regulations, buy-and-bail is still a tricky endeavor with plenty of drawbacks, such as:
- Your credit will suffer greatly. Since foreclosures latch themselves to your credit report for seven years, you really better like that new house because you won’t be getting another mortgage loan for a good long time.
- You might go to jail or get sued. If your old lender finds out that you drew up a fraudulent rental agreement to get the new mortgage, they might come after you with their army of lawyers. Even if you don’t use the fake rental agreement, jilted lenders may still come after your assets including your new home.
- It’s morally wrong. Forget rules and laws and everything else. If you pull off a buy-and-bail, you’ll be just as sleazy as the bank that sold you a mortgage you couldn’t afford in the first place.
- Banks can just say no. If a lender suspects something like a buy-and-bail situation, they might turn your down. But if you’re going for a mortgage with someone other than your current lender, there’s really no reason for the new lender to say no even if they suspect buy-and-bail since only the old lender will have to deal with the resulting foreclosure.
A few banks have wised up to the buy-and-bail scheme and are now requiring people who buy a new home before selling the old to prove they can pay the mortgage on both of them. Of course, even if you can pay both mortgages doesn’t mean you’re going to.
Personally, if you’re that far under on your current mortgage and you want to sell, I think your first attempt should be at making a short sale—selling the house for less than the balance of your mortgage—with your lender’s blessing. You get to avoid any legal tangles, the bank doesn’t lose as much money as it would on a foreclosure, and the house goes to a real person instead of a bank. Of course, if your bank won’t help you out with a short sale, you may be slightly more morally justified in buying and bailing on them.