Buy & Bail – Increasing Despite Efforts to Stop it

The number of Americans, including those in Michigan, buying a new home and then bailing on the old one through foreclosure or short sale is growing.

So you've got a Michigan home that you owe more on than it's worth and you'd like to move.  You look into selling it, but you'd have to bring too much money to the closing table to do so.  So, what are your options?

If you ask around or search the web you're sure to find out about the concept of "Buy & Bail".

The Buy & Bail strategy is relatively simple:  you buy a new home before defaulting on the mortgage on the existing home.

So what's the problem?

It depends on who you ask.

There are moral and legal issues, so let's look at both.

Guilty Morals

There are a large number of people that believe when you sign a contract, you have a moral responsiblity to fulfill that contract. 

When you take out a mortgage, you're basically signing a contract called a Promissory Note, or promise to pay. 

The moral majority have a good point.  Contracts aren't supposed to be broken.  Our whole civilization functions on various types of contracts - moral, ethical, religous, social, legal, etc. 

If we all reneged on these contracts chaos would result. 

Our politicians and regulators adamantly cite moral issues when they beseech homeowners not to "Buy & Bai":

"We're always looking for ways to discourage the practice of buy and bail, but it still seems to be going on," said Brad German, a Freddie Mac spokesman. "It ultimately leads to higher costs for everyone as investors and others look for ways to price in the risk."

"There were a number of policies put in place to squelch this type of activity, but people who are savvy can always find a way to circumvent policies," said Burns of the Federal Housing Finance Agency, which regulates Fannie Mae, Freddie Mac and the 12 federal home loan banks.

"Making it possible to pursue people who do this particular kind of default would go a long way to addressing the buy-and-bail problem," said Jay Brinkmann, chief economist for the Mortgage Bankers Association in Washington.

On the other hand, many contracts do get broken. 

Marriage is a type of contract, but the divorce rate seems to keep going up.

Businesses sign a type of contract with a worker when they hire them, but jobs and pay both seem to be cut at will - even as managment pay seems to keep going up.

Politicians take an oath to uphold the Constitution, a very important contract.  Yet they seem to get caught embezzling, accepting bribes and spending taxpayer money on perks and pork.

Looking at "Buy & Bail" in this context makes one wonder...
Legal - He Who has the Most Gold, Makes the Rules

Is it illegal to "Buy & Bail"?

Not really. 

There are no specific laws against it in the U.S. or in any states.

If you walk away from a home mortgage, there are laws for lenders to foreclosure on the home and take it back.  There are also laws in many states that allow lenders to pursue a borrower for the amount they are owed.  But none of it lands you in jail or prison.

Now if you use a mortgage to finance the new home before bailing on the old one, you may be tempted to commit fraud to get the new mortgage.  But if you qualify for both mortgage payments and don't misrepresent finances or assets, no fraud will be committed or laws broken.
Summary

We all have our own internal moral compasses to follow and should do what we believe best.

On the other hand, we shouldn't be hasty to judge others. 

As the old saying goes, "people in glass houses shouldn't throw stones".

We all speed now and then and have told our share of "white lies".

More importantly, we've all gotten lazy and not involved enough in our political process thereby allowing our politicians to get too cozy with Wall Street.

Has anyone on Wall Street had an issue with their moral compass or gone to jail for the billions scammed through toxic mortgages?

Instead of judging and chasting the "small fish", wouldn't it be more productive to go after the "big fish" that caused this mess?

Michigan, Mortgage, Expert, Birmingham, Bloomfield, Detroit, Rochester, Royal Oak, Troy

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Drew Sygit: CMPS, CMC, CRMS, CMLO, CALO, MBA, NAMB/MAMP Instructor & Speaker
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