Buy and Bail plots help homeowners skip out on guaranteed loans

Getting a second mortgage-guaranteed loan to buy a second home before strategically defaulting on the first mortgage is called “Buy and Bail” – and is becoming a common option. Fannie Mae and Freddie Mac, two of the nation’s largest lenders, have taken actions to quash the practice, but it is still very common. Buy and Bail itself is not illegal, though some borrowers could possibly be charged with fraud.

The workings of Buy and Bail

”Buy and Bail” is the name that some mortgage brokers are using to describe emergency cash loans. A second home is purchased with a second mortgage. Once the family has moved into the second residence, the homeowners quit paying their first mortgage. Usually, the first house becomes the victim of strategic default. Homeowners benefit from doing this because they get a less expensive mortgage payment while their credit is still good – before they ruin their credit with the strategic default.

Economic impact of Buy and Bail

Buy and Bail is a solution that only wealthy individuals can take.

When applying for a second mortgage, the applicant generally has to prove that they have the ability to pay both of their mortgages for a long period of time. Both Fannie Mae and Freddie Mac require the borrower prove they can pay both mortgages for six months or more. Even with these protections, most Buy and Bail first homes are ending up in default. This increases the stock of available homes on the market and deepens the housing crash. The homes defaulted on in Buy and Bail scenarios are usually very costly – worth more than $ 417,000 – meaning they will be on the market for a very long time .

The legal status of Buy and Bail

It feels like Buy and Bail should be illegal—it is essentially an overnight loan just for the well-off stuck in a bad mortgage. The only way Buy and Bail could 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 Buy and Bail. The only consequence for Buy and Bail, if they are entirely truthful, is the credit rating of the borrower drops for seven years.