Financial Crisis Trends: Buy and Bail
One of the latest trends to hit the housing market is the presence of what is known as the “buy and bail.”
Buy and bail
This is an interesting decision that is being made by many people right now. In the buy and bail scheme, someone who sees that he or she is in too deep with a mortgage makes a plan to buy a new home and let the old home go into foreclosure. It works with the buyer moving in quickly. InvesterCentric Blog explains how it works:
For example, say a pair of homeowners bought their home two years ago for $400,000 and now it is worth $200,000. So rather than keep the existing home and its inflated mortgage, before their credit gets damaged they go buy a new home for today’s price of $200,000 and let the old home go to foreclosure. Works great for them, right? Sure, their credit will be bad for a few years, but surely they find that is worth $200,000.
For the most part, the borrowers are able to get the loan by claiming that they will rent out the old house to pay the mortgage (and maybe even generate a little income). This way, it appears that they are still solvent enough to buy a second home — especially one that is so much more reasonably priced. They key is that those participating in buy and bail pull this off before they start missing mortgage payments. At this point they are still desirable borrowers from a bank’s point of view.
As soon as the mortgage for the new place is approved — with its more manageable payments — the plan changes. The borrowers then simply let the old house going into foreclosure.
Foreclosure as a financial decision
This idea of foreclosure as a “smart” financial decision is not a new thing in the housing market crisis. For months now, some people have been deciding that it makes more fiscal sense to simply walk away and deal with the consequences of bad credit for a few years.
What’s new about this, is that there are those who are making concerted effort to get into a new house before things get really messy.
Tags: foreclosure, buy and bail, home mortgage loan, financial crisis,
mortgage lenders, financial trend, credit
