It’s called “Buy and Bail” — getting a second mortgage-guaranteed loan to purchase a home before strategically defaulting on the first. Fannie Mae and Freddie Mac, two of the nation’s largest lenders, have taken actions to quash the practice, but it is nevertheless very common. Buy and Bail is not illegal by itself, but numerous of the borrowers who do this might face fraud charges.
The workings of Buy and Bail
Buy and Bail what mortgage brokers are calling certain types of emergency money. Homeowners apply for second mortgages and buy a second home. Once they are moved and settled in, the family will quit paying the first mortgage. In other words, the first property is the victim of a strategic default. By doing this, homeowners can conserve cash with a less-expensive mortgage before they ruin their credit with the default.
The impact of Buy and Bail
Buy and Bail is a solution that only wealthy individuals can take.
Part of the application for a second loan generally includes proving the applicant can pay both mortgages for a long period of time. Both Fannie Mae and Freddie Mac require that the borrower prove they can pay both mortgages for six months or more. Eventually, though, the first homes of Buy and Bail borrowers are ending up in default. This increases the stock of accessible homes on the market and deepens the housing crash. The homes defaulted on in Buy and Bail scenarios are usually very expensive – worth more than $ 417,000 – meaning they can be on the market for a very long time .
The legality of Buy and Bail
It feels like Buy and Bail should be illegal—it is basically an overnight cash advance just for the well-off stuck in a bad mortgage. The only way Buy and Bail could be prosecuted, though, is if the borrower lied on the loan application. Buy and Bail is not in and of itself a crime – the only thing that anybody can prosecute on is if there was an untruth on the application. The only thing that happens to a borrower who was entirely truthful throughout Buy and Bail is that their credit rating drops for seven years.
