Buy and Bail | Skipping out on guaranteed loans more common

Vacation home

Second-home mortgages used to be used for vacation homes, but now they are used for Buy and Bail. Image: Flickr/ rejohnson71

It’s called “Buy and Bail” — getting a second mortgage-guaranteed loan to buy a house 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 still very common. Buy and Bail itself is not illegal, though some borrowers could be charged with fraud.

The basics of Buy and Bail

Buy and Bail what mortgage brokers are calling certain types of emergency loans. Homeowners apply for second mortgages and buy a second home. Once they have moved into the second house, they default on their first. Usually, the first house becomes the victim of strategic default. This practice allows homeowners to get a house and mortgage payments that are much less than their original mortgage before their credit is ruined.

The implications of Buy and Bail

Buy and Bail is an option that, more often than not, borrowers with large financial resources decide to take.

In order to qualify for the second loan, the family has to prove that they have the income and assets to pay both mortgages for the foreseeable future. Additionally, Fannie Mae and Freddie Mac have instituted a policy where the borrower has to have enough money in reserve to pay both mortgages for six months. Eventually, though, the first homes of Buy and Bail borrowers are ending up in default. This increases the stock of available homes on the market and deepens the housing crash. Typically, Buy and Bail homes are worth more than $417,000, meaning they are not likely to sell quickly.

The legality of Buy and Bail

Buy and Bail seems like a practice that should be illegal — an overnight cash advance for the well-off. The only way Buy and Bail can be prosecuted, though, is if the borrower lied on the loan application. If the borrowers were entirely truthful through the whole process, they cannot technically be prosecuted for Buy and Bail. 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.

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