Buy and bail – where a homeowner buys a new house before his credit is trashed by walking away from the old one – is on the rise, according to a recent Bloomberg report.
According to the article, those most likely to “buy and bail” have a large income and low debt, enabling them to qualify for a mortgage – now at historic lows – on another home. Once they purchase that home, they then walk away from the old home that likely carries a much larger mortgage payment at a much higher interest rate on a property that is worth considerably less than they paid for it.
A Morgan Stanley report noted that those most likely to walk away are debtors with the best credit scores and jumbo loans that exceed the Fannie and Freddie cap limits for mortgages. They have typically lost more than $100,000 in property value.
Both GSEs put protections in place two years ago to thwart buy and bailers, but a Freddie Mac spokesman quoted in the Bloomberg piece said, “it still seems to be going on.”
Of course, if buy and bailers use false information to qualify for a loan on that next house, that’s called fraud. And the FBI is working with local housing agencies to conduct investigations.