With many people seeing and feeling the equity being squeezed out of their home a trend that is happening in the housing market today are homeowners strategically planning to default on their loans. The twist: They first want financing to buy another property. This new fad has been coined “buy and bail” in the real estate industry.
This is where homeowners acquire a new house before their credit rating is ruined by walking away from the old house because the home is worth less than the mortgage owed on it. It’s an attempt to escape payments on a home that is not longer worth what’s owed on the loan due to the housing decline. This practice constitutes fraud if the borrowers lie on the loan application and continues even after the biggest U.S. mortgage companies, Freddie Mae and Freddie Mac put in place more standards to prevent it.
No matter the reason homeowners are doing it, greed or desperation to get out from under that mortgage payment it certainly has not helped the real estate market as it only promotes more foreclosures driving down prices. According to New York based Morgan Stanley about 12% of home loan defaults in February were strategic, meaning homeowners could afford the payments but decided not to pay. Buy and bail more often than not is something people with enough income to qualify for two homes are doing.
About two-thirds of U.S. states allow lenders to pursue a borrower after foreclosure by seeking a judgment which allows the lender to place a new lien on new property for the amount still owed on a previous mortgage. What’s your opinion of the “buy and bail” situation? Would love to hear some thoughts on the subject… feel free to post in the comments below.
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