Housing Swap

The big story today is from the Wall Street Journal's article on buying a new home to bail on the old one. It is a step up from the walking away phenomenon - the houses are so underwater that the homeowners finds a new affordable property and abandons the old one. Here are some snippets -

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

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."

To be sure, walking away from a mortgage, even if legal, has plenty of drawbacks: Borrowers lose the ability to take out unsecured loans, since foreclosures can stay on a credit report for seven years. In some states, lenders can sue for assets, including a new house.

...
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn't have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

Is this another case of blaming the borrower? Over at Calculated Risk they note that lenders have been pushing the numbers for home buyer fraud - making walking away seem widespread but no one can produce numbers. This story sounds similar - anecdotal reports and no data.

In the article there are several examples of people "buying and bailing" but it sounds like most of them can not afford the properties. Two of the examples relocated and are unable to sell the properties without incurring a loss. The featured example sounds as if the owner will not be able to afford her house when her ARM resets - and she can not refinance since the home is worth half of the value she bought it at 2 years ago. It sounds more like the owners want to purchase new homes just prior to foreclosure hitting the old properties. Is this really "bailing" - in most of the cases the buying is done after the bailing but just before foreclosure. This sounds like another case of lenders trying to get sympathy by blaming the ruthless borrowers.