The Orange County Mortgage Blog

One mortgage broker in Fort Lauderdale, Florida, says he gets as many as 10 calls a month from people planning to Strategically Default on their mortgage loans.

But wait, won't that lower their credit scores and ruin their credit rating? Here's the twist; They Secure Financing on Another Home First, prior to letting their current Owner Occupied home slip into a Planned Foreclosure - the newest strategic "option" for some home owners, who're are usually still gainfully employed, but underwater none-the-less. There are Two Schools of thought on this very touchy subject; Read on for the insight.

Real estate professionals call it “buy and bail,” acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s “underwater,” or worth less than the mortgage. It’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 Decline since the Great Depression.

“People were holding on, hoping the market would turn around,” Collier, who won’t work with applicants who intend to go into foreclosure, said in a telephone interview. “But now they’re giving up because there’s no light at the end of the tunnel in places like Florida.”

The value of U.S. homes fell by a third from 2006 to 2009, as tracked by the S&P/Case-Shiller index. In some areas, the losses were bigger. Prices declined 56 percent in Las Vegas, 55 percent in Phoenix and 49 percent in Miami.

Such declines have left more than a fifth of single-family homeowners with mortgages underwater in the second quarter, according to a report yesterday by Zillow.com, a Seattle-based data company.

Rising Strategic Defaults

About 12 percent of residential-loan defaults in February were strategic, meaning homeowners decided not to make payments even though they could afford to, New York-based Morgan Stanley said in an April 29 report. The rate, which was about 4 percent in mid-2007, probably will increase even if home values start to recover, states a mortgage consulting firm in Rumson, New Jersey.

“After home prices bottom, the borrower in a position of negative equity is able to quantify exactly how long it will take to recoup the loss, and may decide to walk away,” Pallotta said.

Jumbo Loans

Most likely to walk away are borrowers with the best credit scores and so-called jumbo loansthat exceed the caps set for mortgages bought by Fannie Mae and Freddie Mac, which range from $417,000 in most locations to $729,750 in high-cost areas, according to the Morgan Stanley report. People who choose to default typically have lost $100,000 or more in property value, said Brent White, a law professor at the University of Arizona in Tucson. No data exist on strategic defaults done in tandem with buy-and-bail purchases.

Buy and bail is most often pursued by people with big enough paychecks and low enough debt to qualify for two homes - that threshold is easier to meet since Home Prices receded and mortgage rates fell to an all-time low,

The average U.S. rate for a 30-year fixed home loan dropped to 4.49 percent, the lowest in records dating to 1971, McLean, Virginia-based Freddie Mac said on Aug. 5.

Home Before Foreclosure

“Most people, if they have the means to do it, would like to make sure they have someplace to live before they let a house go into foreclosure,” Goldman said. “They know they’re going to kill their credit score, so they make sure to get a home they won’t mind staying in.”

Freddie Mac and larger rival Fannie Mae cracked down on buy and bail in 2008 by banning in most cases the use of rental income from an existing home to qualify for a new mortgage unless the first property has at least 30 percent equity.

“There were a number of policies put in place to squelch this type of activity, but people who are savvy can always find a way to circumvent policies,” said Burns of the Federal Housing Finance Agency, which regulates Fannie Mae, Freddie Mac and the 12 federal home loan banks.

In addition to the rental restrictions, the mortgage giants now usually require reserves equal to six months of loan payments for both homes. The measures have been sufficient to block most applicants who attempt to buy and bail, said Pete Bakel, a spokesman for Washington-based Fannie Mae.

“We’re always looking for ways to discourage the practice of buy and bail, but it still seems to be going on,” said Brad G., a Freddie Mac spokesman. “It ultimately leads to higher costs for everyone as investors and others look for ways to price in the risk.”

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.

“Buy and bail is not the most common mortgage-fraud scheme, but it’s something we are aware of and investigate aggressively,” said Stephen K., 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.

Plans for Properties

Mortgage lenders often ask about plans for existing properties when vetting borrowers, said Beede, the attorney. Others don’t seem to care, as long as there is enough income to pay both mortgages, he said. The new lender usually has no stake in the first loan, Beede said.

Clients of Ron Wilczek, a real estate broker in Tempe, Arizona, two months ago bought a house near Phoenix even though they couldn’t sell their existing property because its value had sunk so far below its mortgage.

Now settled in their new home, they may try to sell the first home for less than what they owe, said Wilczek, owner of Metro Phoenix Homes. If the lender won’t agree to a short sale, they may just stop making payments, he said.

“You can make the argument that you must honor your commitments no matter what,” Wilczek said. “On the other hand, you have people who are realizing that if they want any hope of a retirement or a better life for their families, they can’t keep paying for something that will never, at least in their lifetimes, regain its value.”

Ethical or Unethical?

Even if owners have underwater loans, walking away is unethical, said Scott LeForce, president of Realty World Northern California Inc.

“A loss of value doesn’t mean you have permission to run from your obligations,” he said.

In about two-thirds of U.S. states, including Florida, lenders may pursue a borrower after foreclosure by seeking a deficiency judgment allowing a lien on new property for the amount still owed on a previous mortgage.

In states such as California and Arizona, lenders may not have that option if the original home was a primary residence.

“Making it possible to pursue people who do this particular kind of default would go a long way to addressing the buy-and-bail problem,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association in Washington.

Mortgage Rates Bottom Out. Lock'em If You Got'em

Re-print from Mortgage News Daily - Nov. 20, 2009

While benchmark interest rates continue to chop around in a contained range, mortgage-backed securities have moved sideways, failing to make much progress in either direction. Although we have experience a few moments of added volatility, tight trading ranges have kept and

generally "topped out" MBS prices have kept mortgage rates stable all week, near six month lows.

Reports from fellow mortgage professionals indicate mortgage rates to be unchanged from yesterday.

The par 30 year conventional rate mortgage continues to hold in the 4.625% to 4.875% range for well qualified consumers. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee.

As always, you can elect to pay less in closing costs and secure a higher interest rate or pay additional discount points to buy the rate down further.

As previously stated, MBS prices are hitting a ceiling, unable to make enough progress to push mortgage rates any lower. Therefore, if you are still floating, it is time to take advantage of the aggressive rates lenders are currently offering.

Even though there is room for benchmark Treasury yields to move lower heading into year end, we do not expect MBS prices to benefit from continued gains as the recent strong performance of mortgages has many investors thinking about profit taking.

To get your low rate Locked-In Fast, Call us at (800) 564-1500 Today! Or visit our website at; www.LowMortgageRatesOnline.com and click on the Apply 4 Low Rate Button on the Top of Homepage

The Orange County Mortgage Blog

Trigger Leads: How to Avoid Unwanted Calls Right After Already Applying for a Mortgage Loan

Mortgage Rates Bottom Out. Lock'em If You Got'em

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