Business

Buy And Bail On The Rise

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The WSJ reports that some savvy homeowners are buying new homes in the same neighborhood that are far cheaper, and then walking away from their old homes and letting them fall into foreclosure.

The practice is called buy and bail, and while some call it fraud, I call it just desserts for the mortgage companies.

As one homeowner explains in the story, her payments are going to increase from $3,300 to $4,000 a month because of her adjusted rate mortgage, and she simply can’t afford it. What’s more, because the bottom has dropped out of home prices in places like California, her home is now worth $200,000 less than what she initially paid for it!

Here’s how buy and bail works…

Homeowners are able to pull off this gambit — which some lenders and real-estate agents call mortgage fraud — by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders’ unwillingness to cut deals or restructure loans made when home prices were inflated. “It’s just a business decision,” says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”

Do note that bolded passage. Lending practices have enabled this type of situation. If they don’t want it to happen, change the practices.

It is a free market after all, right?