The Home Crowd

Ideal Investment Corner points us towards a recent article by the Wall Street Journal about the “Buy and Bail” phenomenon. In short, it’s a process of homeowners who are upside down on their mortgages who are facing a potential foreclosure, buying a second home to be their primary residence by showing their lender that they intend to rent out their current home. However, after the loan on their new home is secured with their good credit, they allow the old home to go into foreclosure, take the hit on their credit but yet are able to remain in a home.

The Upside: – The opportunity to be one step ahead of your impending credit ruin, and avoid years of apartment dwelling by getting into a home you’re actually able to afford.

The Downside: – Your credit gets hammered for the foreseeable future, you could get sued for mortgage fraud, and you could also have a lien placed against your new property for stiffing your lender with the bill.

From the Wall Street Journal,

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. Although she doesn’t have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

photo credit: respres

But don’t expect this to become a commonplace option to foreclosure. Lenders are busy closing loopholes and Fannie Mae is working on changing regulations to require users with the intent of renting a second property to prove that they could afford both mortgage payments regardless of actual or eventual renters.

From the Wall Street Journal, via Ideal Investment Corner