Thanks to an astute Flipping Frenzy reader, we’ve just been reminded of the “Buy and Bail” scheme, which is particularly pervasive when housing values drop in concert with a sharp rise in foreclosures. If you’re unfamiliar “Buy and Bail,” here’s how it works (courtesy of Nick Timiraos of The Wall Street Journal):
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, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn’t want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.
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.
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.”
For the full story, read Some Buy a New Home to Bail on the Old.
In the meantime, based on what you’ve read thus far, do you think what we’re calling a “buy and bail” scheme qualifies as real estate/mortgage fraud?
Here’s my take:
- The law that governs real estate transactions is referenced on the 1003–-the Uniform Residential Loan Application–which every property buyer signs when applying for a real estate loan (see Title 18, United States Code, Section 1001). To paraphrase the code, you cannot lie on a loan application or any other document related to a real estate transaction. So, if you–as a buyer of the second home-–do not disclose, via the 1003, 100% of your current assets (i.e, that you already own a home and are planning on walking away from it), you’ve just committed a crime that is punishable by fine and up to 5 years in prison. That much is clear.
- Personally, as the WSJ article references, I believe if a real estate industry insider (i.e., a REALTOR®, mortgage broker, loan officer, real estate attorney, appraiser, REO broker, notary, title underwriter, closing officer, real estate investment “guru,” etc.) knowingly collaborates with anyone on a buy and bail-related transaction, they too should be held accountable for their actions (especially when 80% of all reported real estate and mortgage fraud occurs in collusion with a real estate industry insider, and when The Wall Street Journal article in question cites a Las Vegas REALTOR® who receives “one to two dozen inquiries every week from individuals inquiring about a buy-and-bail”).
Finally, in a somewhat related development, if you read Nick Timiraos’ article all the way through to the end, you’ll notice this startling comment from Gwen Muse-Evans, VP of credit policy and controls at Fannie Mae:
If they “have the intention of fraud, then at the end of the day there’s really little you can do to totally prevent that,”
~ Gwen Muse-Evans, Fannie Mae
Wow!! After a statement like that, is there really any question as to why real estate and mortgage fraud is on the rise and that buy and bail schemes are leading the charge? Muse-Evans’ sentiment is right up there with U.S. Attorney General Michael Mukasey’s, who just last month stated that the Justice Department would not be creating a national task force to combat real estate and mortgage fraud as the government did with corporate crime after Enron. “This isn’t that kind of phenomenon,” Mukasey was quoted as saying.
So on the one hand, Fannie Mae’s own vice president of credit policy and controls throws her hands up in the air and proclaims nothing can be done to stop buy and bail fraud, and the U.S. Attorney General says the problem (i.e., real estate and mortgage fraud in general) doesn’t warrant the type of attention that led to stricter enforcement and oversight of corporate America… the same corporate America, mind you, that is enabling buy and bail schemes–and worse. Tell me, where’s the logic in any of that?
As an aside, special thanks goes to Doug Way of the Historic Indian Village Association. Doug took the time to query me about buy and bail after reading Nick Timiraos’ article in The Wall Street Journal.