Underwater Homeowners Try 'Buy and Bail'
People stuck in underwater homes, in which they owe $100,000 or more than the current market value, are tempted to just buy a house in the same neighborhood for less and then walk away from their first home. This is known as "buy and bail." AW Pickel, President and CEO of LeaderOne Financial Corp., says lenders are watching out for this all the time.
Even though the Federal Housing Administraton and Fannie Mae have put out guidance to prevent buy-and-bail, people are finding their way around these rules.
One clear rule is that if a person is buying a house in about the same location, the loan on the second home likely shouldn't be made. But it is left to the lender's discretion. Pickel says that when a lender sees that, he'll start asking a lot more questions about intent. Usually, he says, the borrower will get nervous and just walk away when the questions start.
But Pickel says that a recent loan was rejected in Kansas City, where he's based, when a mortgage applicant came into the lender saying that he had arranged a short sale and was buying a house in the same area for a lot less money. Pickel said LeaderOne Financial refused to make the loan.
Pickel explained that it can be difficult to recognize a buy-and-bail, but there are some key signs they consider. For example, if someone is buying the same size home in the same location, they would face a lot of questions before getting a loan on a second home. His company generally will only lend when it's obvious that the second home is intended as a vacation home and located in a vacation destination.
He also will consider loans to people who work in more than one location. But, if they are buying a second home near the second location, a legitimate purchaser generally buys something smaller, such as a condo. If they were buying a second home as large as the first, that too can raise red flags.
Sometimes people come in saying that they can no longer afford their current home and want to buy something cheaper. If the something cheaper is the same size as the home they currently own, that too will raise red flags. For the case to be legitimate, generally a person in this situation should be downsizing from, say, a 3,500-square-foot home to a 2,000-square-foot home.
Another way that people are getting around the new, stricter guidelines is to buy an entirely new credit history, which is a federal crime. The FBI is just starting to crack down on this fraud. One Kansas City case that Pickel mentioned involved a 40-year-old Kansas City man who appeared to have a 20-year credit history. But when the FBI took a closer look at that credit history it was a credit file that had only be opened for five years. In other words, he had bought the clean credit history from a firm that builds false credit histories.
This types of fraud are among the reasons underwriting is taking so much longer today, Pickel said. Now lenders must seek even a longer paper trail. In the past, a credit report did not include the length of time that the file has been opened, he said, but now more lenders are seeking that information and much more. Lenders even use online mapping services to verify job location information and other key data on an application.
So if you're wondering why getting a mortgage now takes 60 to 90 days, rather than 30, you can thank the growing incidence of mortgage fraud and mortgage default for the wait.
Lita Epstein has written more than 25 books, including "The 250 Questions Everyone Should Ask About Buying a Foreclosure."
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