Some homeowners have figured out a handy way to walk away from their underwater mortgages without putting themselves out on the street: “buy and bail.”
The scheme is that they buy a new home and then bail on their current underwater mortgage, so that their plunging credit score doesn’t hamper their ability to pick up nice new digs. Homeowners are underwater when their house is worth less than the value of their mortgage.
It’s mostly wealthy owners of big homes using the strategy, Bloomberg reports, and they’re often moving into spiffy new homes at bargain prices.
The real rub is that Fannie Mae and Freddie Mac have tightened their rules to put a stop to the practice, but as with so many of Fannie and Freddie’s policies, they’ve fallen short of the mark.
Harvey Collier, a mortgage broker in Fort Lauderdale, Fla., tells Bloomberg that he receives up to 10 calls a day from people looking to deploy the buy and bail strategy.
“People were holding on, hoping the market would turn around,” said Collier, who won’t work with those who plan to default on their mortgages. “But now they’re giving up because there’s no light at the end of the tunnel in places like Florida.”
The problem is unlikely to go away soon. A whopping 11.2 million mortgage loans were underwater as of March 31, according to real estate research firm CoreLogic.
“Never before have American homeowners with mortgages held such a thin slice of equity,” writes AOL Finance columnist Charles Hugh Smith.
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