What are Extenuating Circumstances for Buy and Bail?
Sometimes home owners feel justified because they believe they were duped when they bought their existing home. A few of the reasons buy and bail borrowers feel misled are as follows:
- Mortgage representative did not thoroughly explain the consequences of the financing such as adjustable rate loans will adjust or interest-only payment options do not pay down the principal.
- The real estate agent led the buyer to believe that home values can never fall. In markets where values fall and the buyer has invested little or nothing toward equity, the home can be worth less than the amount owed to the bank.
- The bank might have promised the buyer that a refinance would always be an option and then changed lending guidelines, which made obtaining a new loan impossible.
Under any of the above scenarios, the home owner might feel cornered and pressured into letting the home go into foreclosure but does not want to give up the right of home ownership. In the minds of these home owners, they feel the circumstances warrant deception because they were deceived.
However, it does not change the fact that buy and bail constitutes mortgage fraud and is against the law.
How Does Buy and Bail Work?
Buy and bail involves lying. It typically involves drawing up a phony rental agreement and presenting this false documentation to the lender. Let's follow the steps that a mythical home owner -- we'll call him Claude -- would follow:
- First, Claude decides that -- for whatever reason -- his home no longer suits his purposes.
- Since Claude cannot obtain a new mortgage loan after a short sale or foreclosure, he sets out to find a home to buy before going into default on the existing mortgage.
- Claude writes a purchase offer on the new home and submits a loan application.
- The lender asks Claude for a rental agreement to show that a tenant will move into Claude's old home and make rental payments to Claude.
- Claude asks his buddy Clyde to sign a rental agreement, even though Clyde has no intention of moving into or renting Claude's old home. He submits this fake rental agreement to the lender.
- The lender approves Claude's new mortgage and funds the loan.
- Claude never makes another payment on his old home. A Notice of Default is filed and the home goes into foreclosure, subsequently going back to the bank.
- Claude's credit is ruined, but he doesn't care because he's already bought a new home and has no intentions of moving for a long time.
Why is Buy and Bail Against the Law?
In Claude's case, he falsified loan documents and deliberately lied on his loan application. That is mortgage fraud. Mortgage fraud happens when a borrower withholds information -- such as a deliberate intent to stop making payments to another creditor -- or falsifies information -- either of which would cause the new lender to reject the loan if the lender knew about it.
It's also considered fraud to lie on a loan application and produce false documents to the lender. The FBI defines mortgage fraud as "any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan."
As a result of buy and bail practices, Fannie Mae guidelines now require buyers to qualify for mortgages on both homes at loan inception, unless the existing home has plenty of equity. That's because a home owner with plenty of equity would be foolish to walk away from it.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.