Although it may sound like an appealing idea it can create long term damage in both the home owner’s financial status and the community at large. The name given to the process of buying a new home before ceasing payments on the old it and simply letting it go into foreclosure is called “buy and bail”. Interestingly enough this tactic was even taunted as being an acceptable method of disposing of an unwanted, undervalued and over-leveraged home as we entered the current market economy in real estate.
Pinpointing exactly where the tactic began to gain in popularity is difficult but it certainly has been very prevalent in California and Florida. Other devastated cities may not have seen the level of buy and bail as metropolitan areas like Atlanta or Chicago where buyers could still qualify for a loan but had no intention of maintaining payments on their existing home which may have decreased in value as much as 40% or more.
How does it affect the home owner’s credit?
Foreclosures are very devastating to one’s credit history. Banks and lenders, including the larger investors and Government Sponsored Enterprises (GSE) like Fannie Mae and Freddie Mac, generally require 5 to 7 years to have passed after a foreclosure on a home mortgage before they will consider making a new loan. Many home owners are willing to take that hit to get out of a mortgage on a home worth as little as half the current payoff.
Adjustable rate mortgages, especially on homes which have been devalued well below the mortgage payoff, have presented the greatest numbers of buy and bail foreclosures. In areas where homes sold in the mid 2000s for as much as double their current value and where ARM loans were used at very high loan to value numbers there is still a sweeping infestation of buyer bailed foreclosures. Delays in bank workouts, short refinancing and even short sales have added to the plague.
Is it against the law?
Currently, to the author’s knowledge, there is no law against the tactic. There may, in localities however, be laws which provide remedy for this simply due to the decrease in values of other properties in the area the act may cause. Lenders may not be able to press charges but they certainly do have the right to seek deficiency judgments and the courts seem inclined to side with them in the case of buy and bail.
It affects all home buyers.
Because of the great number of buy and bail events it has become increasingly difficult, if not impossible, for home owners looking to convert an existing property to a rental property and to move up to a bigger home, better neighborhood or whatever their need may be. As a general rule the new lender (for the purchase on the new home) requires the existing home to have a minimum of 25% equity which often requires an appraisal on the existing home to evidence. If the reader wants to avoid being caught in the web of trying to purchase a new home when they have an existing home the best cure is cash.
Cash may be used to pay the existing home loan down below 75% of its current appraised value which removes the concern about the home owner ceasing payments on their existing home once they acquire the new property. Likewise a high down payment on the new property may remove the concern if the home buyer presents there purchase as a strong credit, cash and income purchase.
As always the best information should come from a trust, local home mortgage professional. Real estate agents will not have the full information available to them to address this type of concern which often involves many professionals inside the mortgage industry.