Harvey Collier, a mortgage broker in Fort Lauderdale, Florida, says he gets as many as 10 calls a month from people planning to default on their loans. The twist: They first want financing to buy another home.
Real estate professionals call it â€œbuy and bail,â€ acquiring a new house before the buyerâ€™s credit rating is ruined by walking away from the old one because itâ€™s â€œunderwater,â€ or worth less than the mortgage. Itâ€™s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.
The practice, which constitutes fraud if borrowers lie on loan applications, is continuing even after Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, beefed up standards to prevent it, according to brokers such as Collier and Meg Burns, senior associate director for congressional affairs and communications at the Federal Housing Finance Agency. Whether driven by greed or desperation, the persistency of buy and bail underscores the lingering impact of the worst housing crash since the Great Depression.
Still Going On
â€œWeâ€™re always looking for ways to discourage the practice of buy and bail, but it still seems to be going on,â€ said Brad German, a Freddie Mac spokesman. â€œIt ultimately leads to higher costs for everyone as investors and others look for ways to price in the risk.â€
Buy and bail is fraud if applicants provide false information to obtain a loan, said Steve Beede, a real estate attorney at BPE Law Group Inc. in Fair Oaks, California. The Federal Bureau of Investigation is pursuing more than 3,000 mortgage-fraud cases, almost double the number from a year earlier, FBI Director Robert Mueller said in a June 17 statement.
â€œBuy and bail is not the most common mortgage-fraud scheme, but itâ€™s something we are aware of and investigate aggressively,â€ said Stephen Kodak, an FBI spokesman, who declined to give specifics about cases. The bureau works with state police and local housing agencies to conduct investigations, he said.
According to this article this is Fraud. Beware of this practice.
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