Buy and Bail – Mortgage Fraud?
What is it that happens when you suddenly find yourself in a dire situation as a home owner? Your home, once thought to be the greatest investment of your life, an ever-appreciating building block to financial independence, is now valued significantly lower than what you bought it for. You owe more to the bank than what your home is now worth, and if that’s not all enough of a kick in the stomach, your once fixed loan is now adjusting. You can no longer afford the payments on your home and every day that this problem lingers, your anxiety grows and your stomach turns. It is an awful situation that many people are finding themselves in today, and there is only one way to tackle the problem: Head on.
Of course, there are always those who try to finagle their way around a problem, and though in the short term this may seem like a good solution, it will be much more damaging in the long run. One way people have tried to come out of this type of situation unscathed, is by a tactic called Buy and Bail, which is illegal and considered Mortgage Fraud. In this type of scenario, a homeowner, understanding that their home is upside down (they owe more than it’s worth) and they can’t afford the payments, will attempt to buy a new home, claiming their first home as a rental, and once they’re moved into the new place, cease payments on the old home and let it fall into foreclosure.
Some homeowners feel that their current situation is no fault of their own, but rather the real estate agent that led them to believe that home values would never fall, or the loan officer that didn’t explain the consequences of adjustable rate loans, and as a result, they don’t find anything wrong in Buying and Bailing. But not only will letting your house fall into foreclosure ruin your credit, it needs to be reiterated that buying and bailing is illegal. For two reasons: First, in most cases because there is never any intention of actually renting the house out, and in order to prove to the banks that they intend to rent it out, they falsify a rental agreement signed by a friend or relative. Second, and more importantly, it is considered mortgage fraud when a borrower withholds information, such as a deliberate intent to stop making payments on their original home. Banks are now very aware of this type of fraud and it is no longer even a feasible option, but it is important to remember that you would not be helping yourself or your situation by even considering such a tactic. There is another option, called a Short Sale.
A short sale is an agreement with the bank allowing you to sell your home for less than what you owe. At face value, this idea doesn’t help the anxiety churning in your stomach, because you’re forced to sell your home, and even worse, pay taxes on the difference of what you owe to the bank and what you sold it for. But the greatest value in doing a short sale comes in the form of saving your credit and ultimately giving you some peace of mind. Letting a home go into foreclosure is much less of a hassle than a short sale, but the end result is that your credit will be severely damaged, and your ability to qualify for a loan will be put on hold for several years. But a short sale will save your credit from the damage of a foreclosure, and as soon as you are able to, you can qualify for another loan, and find yourself back into a home, credit intact, and the upside down mortgage a distant memory.
Andrew Brentan is a Team Aguilar contributor and responsible for this post.
November 7th, 2008 at 6:07 pm
Interesting information, I have a guy that I work with that tried to do this but the bank would not let him get a new loan because his existing home was worth so much less than what he owed to the bank. They told him he would need a 20% down payment to get a new loan to purchase!
November 9th, 2008 at 12:29 am
Its nice to see more and more people doing short sales. The only issue I have seen is that banks (just like homeowners) are frequently unrealistic about what their properties are worth.
November 11th, 2008 at 4:27 am
I think that the agents should be responsible enough to tell their customer on what will happen in the future and what are the factors to be considered in buying a home as well as the possible things that would happen. I personally think that it would feel so bad that the money that you used to buy it will not be the same when you sell it.
November 11th, 2008 at 5:27 am
This is somehow risky, because you are digging just another hole if you are not shopping around for the best rate there is. Also consider how much is your real asset’s worth.
November 11th, 2008 at 3:54 pm
Unfortunately I have been in a situation exactly like the one you are talking about. No matter how you look at the situation it is still heart wrenching. We were facing foreclosure and was not sure what to do until a real estate investor and agent mentioned a short sale. It was still a process but it did make the situation a little bit more bearable as we knew we would not have foreclosure on the credit report. I would recommend short sale over foreclosure on my credit report.
November 12th, 2008 at 7:51 pm
It’s a tough market out there and interesting to see Paulson on TV this morning. It will be interesting to see if the home owner actually benefits from all of the mortgage assistance they claim to be talking about. Banks have stated that they are going to take a much more proactive approach to modifying loans.
November 14th, 2008 at 7:49 pm
But where do you draw the lines… personally I feel like we should just let those who took out loans that they couldn’t afford, just take the hit. But at the same time, if that happens, that would have a very bad impact on the economy. However… if we keep bailing people and companies out…. what kinda of precedence does this set for the future? SO many questions!!!! arghhhh
November 14th, 2008 at 9:12 pm
Very well put Jean. I think people need to learn once and for all that their actions have responsibilities. I understand that for some families and individuals that buying was a struggle, but at the end of the day you always need to assess things financially, look at the long term, and think “can I really afford this”. None of this would have happened if people had that mentality.
November 16th, 2008 at 8:17 pm
I have to agree with Jean, it is tough to know that my money is going to bail out those who got in over their heads when I have made very careful decisions and have not found myself in this situation. Yet at the same time I understand that their failure does end up affecting as all in the end.
November 23rd, 2008 at 8:31 pm
Yes buy and bail is reprehensible, but how could the banks have fallen for it. The banks I have delt with have always refused to count rental income on a property until there has been a 12 month history of it.
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December 14th, 2008 at 1:45 am
A short sale would cause you to lose some financially, but it saves you your credibility.
December 15th, 2008 at 1:16 pm
I would say that a short sale can still have a really big negative effect on your credit so don’t assume that your credit will be OK. Many times it will require that a borrower be delinquent before the bank considers a short sale. In the long run you will likely not have as much damage but it’s going to effect your credit either way.
January 10th, 2009 at 11:24 am
The banks have to be looking at the new mortages more and more. I find it hard to believe that they would not realize what the people are doing. If they look at existing home and see people under water how could they ever give them new loan or want to.
I am sure people try it and some have done it and yes they should get in trouble for it.
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February 3rd, 2009 at 6:42 am
This is somehow risky, because you are digging just another hole if you are not shopping around for the best rate there is. Also consider how much is your real asset’s worth.
March 5th, 2009 at 2:59 am
It’s easy to blame the banks, the government and the state for ones own misery when you are in danger of losing your home. However, I tend to agree with what somebody else already said above.
People ought to take responsibility for their own actions. This means if you can’t afford to buy a home, then don’t go over your head and buy it anyway. Unfortunately too many home owners have done exactly that. They borrow way above their comfort zone and now they find themselves in a massive mess.
Sorry guys, but it IS ALL about budgeting your finances.
June 16th, 2009 at 10:07 am
My husband andI purchased a home in AZ due to my husbands company moving us due to job related reasons. We purchased a very nice home and had the money to afford it. My husband and I have excellent creidt and have always paid our bills on time. When we learned that ourhome is 170,00 less than what we bought it for we called the banks about a loan modification. My husband was laid of in January and started a new job in March. My husband is the bread winner and affords our motgage . I called the bank asking them about a loan modification and the person on the line told me that they are not doing anything with the money. I asked her to repeat herself becasue I was completely shocked. I then asked what they were doing to help those people that are underwater and here the bank was given all of this money . She told me that they are not doing anything and the CEO’s were having a great time at the golf courses. It was just a bad investment part on your choice is what she told me the bank would tell me.
Okay yes we urchased our home and yes we could afford our home and can still. However my home is not worth 3what I paid for it and I understand that. Yes people are losing their homes for different reasons. But, why are the banks being given all of this money and not helping those that need it. The banks are the reason we are in this mess no I am not passing the blame on them becasue I want it off of the American people. Each and every American wants to live that American dream and be able to provide for their family. When a bank tells borrows that they can buy X amount for a house knowing that the borrower could not afford that (what consequenses are the banks paying for) NOTHING, they are being given money and not helping those that needed and YET again we the people are going to continue to pay for thier mistyakes. Just look at our economy and the loss of home and jobs. WHY are the lenders not being put in jail for fraud lying to us the tax pays. The money they were given in the bail out is our money yet I find it interesting they are not giving us our money. So why is it wrong that people are buying and bailing? The banks gave people false hope on the American dream and those people are homeless and doing whatever they hqave left to support their families. They have no credit, so our economy is going to get better with all of these people with poor credit. THE BANKS SHOULD BE PUNISHED FOR LYING TO PEOPLE TO START WITH. The FBI should look at the banks and the borrows income and see which ones were put into homes they couldn’t afford to begin with. I was raised to take care of my responsibilities but when my home has lost so much value becasue teh baqnks lied to the borrowers around me why should I have to PAY for the banks continous mistyakes and WHY should you. The loan modification is merely qa fix for the next five years if you can e4ven get one and when five years rollls around we are going to have a much bigger problem on our hands because those that got the loan modification are going to have problems paying their mortgage. If a bank can steal and lie and have no consequenses why are Americans who entrusted in them being held accountable?
August 31st, 2009 at 1:01 pm
Very right article! It was needed, and the lady above me will share some of my concerns, as she said that Banks has lied to the people. Very true! I’ve saying about the total problem it has caused to the economy! All businesses run on loans these days and if you over-value the loan, it will bring more markup and same has happened. The house prices were over-priced and the owner had to pay much more than the house was worth it hence now they find that their house prices are lower. It’s a cycle that I think not only caused Banks trouble but everyone.
September 27th, 2009 at 12:14 am
The buy and bail phenomenon has been becoming more prevalent. The market has been seeing a lot more strategic defaults too!
October 1st, 2009 at 1:57 pm
The main things to watch out for when getting a loan, apart from the interest rate, are any fees or pre-payment penalties. These can be the ‘sting in the tail’.
April 4th, 2010 at 7:45 am
Many home-owners in New Zealand have been through the same situation as many faced in the USA in the last few years. It hasn’t been as extreme and there hasnt been as many foreclosures however. The banks have got a lot stricter with loans now, I think the worst is over though thankfully.
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