06.20.08
Buy a New Home, Bail on the Old
Situation: An acquaintance of yours plans to walk away from her four-bedroom house in a close by subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby. She comes to you for advice. She can find the same exact house now for half the price she claims. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300, and she doesn’t want to continue to own a home that is now worth $200,000 less than what she paid for it just a couple of years ago. What to do?
Across the country with falling home prices and rising foreclosures, lenders are discovering this new trend - borrowers with good credit, who buy a second home at a much lower price than the one they have, then default on the mortgage for their first home. We are not talking sub-prime mortgages here, we are talking market fluctuation.
Homeowners are even being coached through the process by unethical real estate agents. A few unethical agents, looking to obtain a commission encourage clients to run, not walk away from their mortgages. They are told to make payments only until they close on the new house. Rarely are they told the downside of significantly damaged credit. The agents quip it is not the buyers fault. The lender appraised it too high! The lender is unreasonable. The lender is refusing to forgive the debt or restructure the loan. The agent does not mention the fact that in order to legitimately qualify for the new loan, the borrower will likely have to dishonestly hide the liability on the existing loan application and can be subject to serious legal penalties for fraud.
Notwithstanding the mortgage industry’s frenzy as it tries to restructure billions of dollars in mortgages, it appears fraudsters have been able to “buy ‘n bail” with ease. The lending industry is just catching up to the latest scam.
The End Result?
Lenders and government agencies are once again forced to draft more and tougher regulations so that homeowners cannot qualify for new mortgages as they bail on old loans that going into foreclosure. Accordingly, Fannie Mae is making changes that will likely take effect in July, so that borrowers with a mortgaged first home have to produce signed leases to prove that they can pay both mortgages, property taxes and insurance on both residences, or they will have to provide proof of sale for the first residence to qualify for the new loan.