Buy And Bail On The Rise

Buy And Bail On The Rise


The WSJ reports that some savvy homeowners are buying new homes in the same neighborhood that are far cheaper, and then walking away from their old homes and letting them fall into foreclosure.

The practice is called buy and bail, and while some call it fraud, I call it just desserts for the mortgage companies.

As one homeowner explains in the story, her payments are going to increase from $3,300 to $4,000 a month because of her adjusted rate mortgage, and she simply can’t afford it. What’s more, because the bottom has dropped out of home prices in places like California, her home is now worth $200,000 less than what she initially paid for it!

Here’s how buy and bail works…

Homeowners are able to pull off this gambit — which some lenders and real-estate agents call mortgage fraud — by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. 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 agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”

Do note that bolded passage. Lending practices have enabled this type of situation. If they don’t want it to happen, change the practices.

It is a free market after all, right?

  • J. Harden

    Gosh, I wonder why real estate agents and mortgage brokers see nothing wrong with it. Could it be that they make there money at closing and initiation fees? No, surely their stance is one of principal, integrity and virtue.

    The fact is, it is fraud against the 2nd lender, not the 1st lender. It is a breach of contract against the 1st lender. This is all done, by the way, with the assertion of rental income from the 1st property. The mortgagor claims that the 1st property will be rented out with income to cover that mortgage. When in fact, there is no intent to rent the property or receive any kind of income. The 2nd lender really loses nothing and so they don’t care that much — it fraud though because if the 2nd lender knew upfront of the lie, then the credit viability of borrower would obviously be effected.

    It is totally wrong to say that no one gets hurt with this fraud. All of us who own our homes and make the mortgage payments, will continue to see our property value diminish because of this fraud (and that is exactly what it is under 18 USC 1001, 1014, 1344.)

    The fact is “anti-deficiency” statutes such as the kind that exist in California and Arizona encourage this kind of fraud. If the homeowner was liable for the difference between a forclosure sale and amount of the loan, this type of fraud would not exist.

    Lending practices have not enable this practice, but rather peoples’ willingness to default on their obligations and lie, have enabled this scheme. And with all due respect, to make to inchoate connection between this fraud and “the free market” indicates a non-comprehension of both the free market and fraud.

  • Tom Steele

    You are missing the boat. You call it “just desserts for the mortgage companies” but that overlooks the very real likelihood that the company that holds the mortgages that is being defaulted on is probably not the company that issued the mortgage in the first place.

    It is probably now a part of some derivative package that someone like Bear Stearns was holding and the rest of us are all now picking up the tab on because of people walking away from loans they shouldn’t have taken out.

    You also seem to place the blame on the mortgage companies that issued these loans, while giving a free pass to the “johns” that signed up for them.

    That disappoints me.

    In the end, people who bought houses they could afford, rather than mindlessly or fraudulently taking out loans that they didn’t understand or couldn’t possibly repay if the market changed even slightly will end up footing the bill for those who lived above and beyond their means.

    Just another form of punishment for the rational and decent people of the world.

  • million

    Justin wrote, “If they don’t want it to happen, change the practices. It is a free market after all, right?”

    my feelings exactly.

    homebuyers are not a charity, maybe someday UNICEF will get into the homebuying business but until then the lenders will have to accept the reality of a system they enabled.

    i have no confidence the lenders will ever voluntarily regulate or reform themselves, or re-structure these loans. instead they will continue to squeeze debtors as leverage to get their share of the bailout from Congress.

    as always, LET THESE BANKS FAIL.

  • Franklin

    The truth is, that is not that some can call this fraud, but that in some cases it may actually be fraud.
    Under the law, you are responsible for any shortages between what you own and what the bank can recover from the sale of the good (unless you have PMI). All the bank has to do is to prove that you had the means to pay your debt and you will be hit with 5 years.
    If you don’t have the means to pay, the bank will not be able to accuse you of fraud, but they still can go after the shortage.
    The only “savvy” individuals here are the real estate brokers, who found a way to make money on a slow market.

  • Joe

    Me thinks J. Harden works for the mortgage industry.

  • Tommy Paine

    I agree with J. Harden and Tom Steele – the borrower who walks away from an outstanding debt and into what may well turn into another one is equally culpable.

  • Sick of mortgage Fraud

    Review the borrower’s mortgage application, know as a 1003. When the borrower signs this application, it is an affidavit. If the borrower claims that the first property will become a rental property and then they let it go into foreclosure, then they lied and have committed mortgage fraud. The parties that helped them in this are also complicit and all should be prosecuted.

  • anonymous

    @Tom Steele: Yeah, apparently those people who bought complicated derivative instruments due to the sheer greed should be spared the injustice of having their risky investment go broke. I mean why in the world should they be accountable for their actions? Welfare for the rich! God bless America!

  • c.tucker

    How can it be breach of contract when the mortgage says if you don’t pay we get the house. It’s fulfillment of contract.

    It’s not what most would consider the optimal conclusion of the contract. But at no time does anything violate the contract, it just shifts from “account current” to “account in arrears” section. Otherwise the bank’s claim on the house would be seriously weakened

  • http://None Mike

    I think “Sick of Mortgage Fraud” hit it on the head. The borrowers do sign a 1003 for the new home and if they lie on it they have effectively commited perjury and they, and whoevere coached them (if in fact that happened – remember that sometimes the borrower is the only one cupable) is also guilty. They would have had to produce at least a rental agreement on the existing property. I am under the impression that underwriters are now checking to be sure there is actually a renter by calling and veryfying at least his/her existence. If after the mortgage on the new property was closed and the borrower said that the potential renter backed out, once depositions are taken (if ever) it is amazing how the truth seems to come out.

    The problem is that the regulatory agencies are do not want to go after oneies and twoies. They look for massive fraud and because the bad actors who know this they think, and in most cases can, get away with this.

    If the regulatory agencies dropped kicked one of these fraudsters (borrowers, real estate agents, brokers and/or lenders, etc.) through the goal posts and then made it public that would go a long way to stopping this type of fraud in its tracks.

  • DD

    I would say that a foreclosure is not a fulfillment of the contract. A fulfillment would entail paying all monies owed under the terms of the contract.

    I would say that ceasing payments constitutes a breach and the legal remedy available to the bank is foreclosure. IANAL though so this is my own view.

  • J. Harden

    c.tucker – Foreclosure is a remedy for breach of the contract. By your definition any contract is fulfilled by execution of the contractual remedy for breach. If the morgage has a “specific performace” clause and this scheme is unearthed, the mortgagee should go after the borrower with gusto. It is fraud, plain and simple.

    Franklin — that is not the case in states with an anit-deficiency statute. In those states, it is the lender that must eat the difference between the foreclosure sale and the loan amount. In states like Missouri, yes, the lender can get a deficiency-judgement and proceed to put a lein on the new property. Which they absolutely should do.

    Joe — I am actually very sympathetic towards people that have gotten themselves into bad mortgage situations, but I consider fraud a pretty trashy solution to any problem.

  • ExiledIndependent

    If lenders are engaging in predatory practices, they absolutely should face the consequeces of their actions. But in this story, I kinda feel for the lender. This is a person who felt like she could handle a $3300 mortgage; I’m thinking she isn’t some poor little old lady who was bamboozled by a mean banker (twirling his waxed moustache, most likely).

    First of all, ARMs are bad ideas if you’re really looking for a place to live long-term. People need to take responsibility and educate themselves before making what is probably the single biggest purchase in their whol life. I’m guessing that she bought too much house when the market was hot, thinking that she could flip it for a profit. When the market went south, her solution is to commit fraud? I would in no way applaud that or consider it well-earned comeuppance for the bank.

  • vinman

    saying you are renting the house and in turn walking away is bank fraud , the lender will want to see the bogus lease agreement , which is also bank fraud , a real-estate agent , or mortgage broker who assists in this practice is also accessory to bank fraud . if a lender who doesnt look at an application , and at this point in the game , doesnt ask for a cancelled check for first and last , or look and see who the renter is where the property is located etc etc etc is a pure idiot and should be prosicuted with the rest . and for this realtor to speak about her criminal actions and give her name LINDA CAOILI – should get the idiot of the year award and deserves to be the jail cell toilet mop that she will be …..

  • Joe

    Now this realtor should not be going around and offering people alternatives to meeting their current obligations. She appears to be doing this as a new selling tool which should be illegal. And the lenders should not be offering programs that allow this behavior. All involved in these transactions should be held responsible for the loss incurred on the home being foreclosed.

    Now the author thinks its great that the lender gets the shaft. But we all know the trickle down theory of this government which means we, the middle class will foot the bill, cover the losses for these lenders and the 1% of americans that own 50% of corporate america. Our taxes will be raised, our homes will continue to lose value, our dollar will buy less, and fuel will rise more. Finally our retirement age will continue to be raised. So who is getting screwed by this behavior.

    As a mortgage broker myself I have no idea in todays market how these people are pulling this off, and any smart mortgage broker who does not want a visit from the FBI should stay clear of these deals.

    Let the prices fall as they will, no bailouts of the homeowners , lenders, Wall street anyone. Greed got them all in so let them suffer now, not the rest of us. Most borrowers knew what they were getting when the dollar signs were in their eyes but when the pyramid crumbled everyone became a victim. Don’t be fooled by the sob story or the blame game. Lets get back to prices people can really afford.

  • ej00807

    It’s a market correction. The loans are upside down and thats not fair to anyone. A proactive government should have a loan rewrite program to help people deal with the economic adjustment occuring broadly across our economy.

    Home prices NEED to come down, and it’s not fair to home owners to loose EVERYTHING for something that is out of their hands.

    Right now, the banks are getting forgiveness and lots of cheap money. But folks, are they extending any of that favor to the people who are actually affected? NO they haven’t done anything to help US.

    This situation will eventually affect every single homeowner folks.
    So stop blaming ‘society’ and start demanding fair treatment from the banks: ie- loan market adjustments, loan write downs and better rates.

    Also victims of these mortgage refi scams should be recompensed from the government directly. Their lack of enforcement, regulation and intelligence about this situation is unforgivable.

    We need broker standards, contractual standards and fair terms for everyone. Not just people who can afford to bring an attorney to the buying table.

    Bad loans and a constant upward push to real estate got us into this situation. Now the only thing that can get us back to sanity is about 10 years of adjustments and some new leadership and, yes red hats, something called – regulations.

  • puravida

    Im somebody who is about to buy and bail.

    My starter home was bought in 99. I am now 50k upside down in it. I cant sell it or rent it for the cost of the mortgage. The neighborhood has gone to hell. Illegal immigrants have taken it over. Last week, my neighbor was hanging dead chickens from his front door. I am semi-fluent in spanish….which is good because I can talk to my neighbors.

    Here’s my choice, live in hell or find the only way out.

    Luckily I make more money now than I did then. I qualified for my second loan without any promise of renting out the first. My new home will be built in august. I will move in and immediately stop paying on my second.

    Yea, I feel shady…..but I refuse to let my 2 year old grow up in that neighborhood.

  • liz

    There are supposed more affordable loans out there, some allowing no or little money down ( They have done this because most people did not make enough to have accumulated anywhere from 50,000 to 150,00 to put down on a basic no frills home- which would have been necessary with how ridiculously high home prices were in Southern California for about 10 years)- many Loans were still closing with little down and a 50% debt to income ratio, so prices kept going up, even though they were inflated- Why did they keep going up? Because people could still get loans for unnafordable homes for over a decade(your debt to income should be no more than 30% not 50%)- which resulted in investors, not everyday homeowners hoping to own a home, making a killing. They made a killing of off overinflated home prices that kept selling at an even more inflated price.

    What ever you decide to do, You want to be closer to a 30% debt to income ratio. If the banks only gave loans to people with a 30% debt to income ratio- houses would have come down in price a loooong time ago, because far less would have qualified for the loans. Less investors would have profited from ignorant, less financially able victims.

  • liz

    Amen to what ej00807 Said!!!!

  • markp

    Hello, I have a question. I purchased a second home, and currently have been renting my house for the last year. I am getting tired of being a landlord, and am still losing money each month as my rent is less than what I pay for the mortgage.

    What are the ramifications if I let the property go into forclosure after the current renters lease is up? Can the bank go after the equity on my new property, or somehow, make me liable for any loss? I live in MN, if that makes any difference.

  • Vegas Upside Down

    What you are all missing is that it is not illegal to do a “buy and bail” if you fully disclose that you do not have a renter for your old home. New FHA loans require you to prove that you can pay both loans, even if you do not have a renter before you move to the new house. You have to pass an income analysis stating that you can afford both payments. The key to a buy and bail- file bankruptcy after you buy the new home. Bankruptcy is the only way to protect yourself from the fear of any lender coming after you once you foreclose. Don’t get upset that you don’t want to ruin your credit by filing bankruptcy- are you kidding me, your credit is already crap. Save yourself the hassle of waking up one morning and having your bank account drained by a judgement. Two can play at this mortgage fiasco going on in this country. You have to protect you and your family- you have options!!!