We are living in crazy times!
There appears to be an over abundance of homeowners on the horizon that are looking to “buy and bail”. Talking with many mortgage brokers the trend seems be be on the rise as they are experiencing more calls from prospective homeowners looking to finance a new home so they can dump their current property to buy a new one that in many cases is more home for less dollars.
This is the one of the newest trends that mortgage lenders are being watchful of as the trend continues even though Fannie Mae and Freddie Mac have pulled out all stops trying to tighten down the noose on many would be homeowners according to Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency.
The Reality…
About 12% of all mortgage loan defaults were strategic in that the homeowner decided not to make payments even though they could afford it according to Morgan Stanley in an April 2010 report. This rate is up over 400% from the 3% level estimated just 3 years ago. And it is rising…
The value of homes across the country have fallen over a third from 2006 to 2009 with major losses in markets like Las Vegas down 56%, Phoenix down 55%, and Miami down 49%. Depending on the source it’s estimated that 20-25% of single family homes are underwater as of June 2010.
The Advantages…
The reasons for doing this can appear obvious. I mean seriously, if you owe 100k more than your house is worth and believe it can be 10 plus years before you get back to even then it makes sense to bail, right? If you could buy a new home that has the same square footage or larger than you currently have AND save on the monthly payment then what’s there to think about? Seems logical to me, right?
Many people are feeling as there is no light at the end of the tunnel on home prices and the longer they wait the more pain they feel. The bailing on a home is further justified as people scramble to gain a footing on their finances for retirement and realize it makes no sense to put hard earned investment dollars into a sinking ship.
While one side of the argument says a mortgage is a moral as well as legal obligation and that if you are able to pay you should continue to do so. However, some homeowners feel the old value won’t be seen again in their lifetime so the decision is dare I say “easy” to move on.
The Warnings…
Most people that pursue the buy and bail have good credit to begin with. Your credit score can take a quick 125-150 point drop once you let the first property go and are hit with a short sale or foreclosure. This alone is not stopping people from moving forward as many times this can be corrected at a later point and bottom line, some bad credit for a short time is much less costly or damaging to your financial well being than hanging on to a house that is upside down.
The FBI is currently pursuing 3000 cases of mortgage fraud so make sure your application for your new loan is true and accurate. Robert Mueller of the FBI stated that this number is up almost 50% over last year. “Buy and Bail” is fraud if you submit false information so double check your decision before jumping on the band wagon.
Fannie Mae and Freddie Mac have instituted new lending criteria over the last 2 years to curb this trend. The requirement to have 6 months reserves for both properties and banning the use of rental income for your existing home unless you can show a minimum of 30% equity have prevented some would be homeowners from qualifying.
Crazy times sometimes calls for crazy decisions. Just weigh out the risk vs reward before jumping on the bandwagon.
Be Bold!
Hey herschel, this is some good information on “buy & bail” types of transactions. As far as I’m concerned it’s a strategy that will begin to see a certain amount of decline as natural dis-incentives begin to pop up, as you pointed out to some extent in your “Warnings” section of this blog.
The value of homes across the country have fallen over a third from 2006 to 2009 with major losses in markets like Las Vegas down 56%, Phoenix down 55%, and Miami down 49%. Depending on the source it’s estimated that 20-25% of single family homes are underwater as of June 2010.
This alone is not stopping people from moving forward as many times this can be corrected at a later point and bottom line, some bad credit for a short time is much less costly or damaging to your financial well being than hanging on to a house that is upside down.