It’s called “Buy and Bail” — getting a second mortgage-guaranteed loan to purchase a residence before strategically defaulting on the very first. The action is still very common, despite the belief that Fannie Mae and Freddie Mac have tried to limit the practice. The only thing some borrowers might be charged with is fraud, because Buy and Bail is not in and of itself an illegal practice.
The basics of Buy and Bail
Buy and Bail what mortgage brokers are calling certain types of emergency money. Homeowners apply for second mortgages and purchase a second home. Once they’re moved and settled in, the family will quit paying the first mortgage. Usually, the first house becomes the victim of strategic default. By doing this, homeowners can conserve money with a less-expensive mortgage before they ruin their credit with the default.
The implications of Buy and Bail
Buy and Bail is an option that, more often than not, borrowers with large financial resources choose 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. Both Fannie Mae and Freddie Mac require that the borrower prove they can pay both mortgages for six months or more. The majority of Buy and Bail homes, besides these protections, are ending up in default status. The end result of this is that the housing downturn continues. Typically, Buy and Bail homes are worth more than $ 417,000, meaning they’re not likely to sell easily.
Is Buy and Bail a lawful move?
It feels like Buy and Bail should be illegal—it is basically an overnight cash loan just for the well-off stuck in a bad mortgage. 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 can’t technically be prosecuted for Purchase and Bail. If a borrower is 100 percent truthful throughout the entire loan application process, the only thing that happens to them as a result of Buy and Bail is their credit rating drops for seven years.
