It turns out that prices have fallen enough in some housing markets that existing homeowners can finally afford that second home -- and then promptly stop paying on the first. The Wall Street Journal gives us anecdotal evidence of the so-called "buy and bail," in which we see borrowers trading a new mortgage for a defaulted one:
Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby. "I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.
Nothing like admitting fraud publicly, we suppose. The WSJ notes that the practice isn't yet widespread, but with agents and brokers on the case it likely won't be long until everyone is doing it, right? Sayeth the Journal:
In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."
Of course, what the Journal doesn't say is that Caoili could give a rat's you-know-what about the existing mortgage; she only cares about the commission she earns by putting the borrower into that other house, and making that next sale. From an agent's perspective, it's probably not much of a leap to go from pushing stated-income option ARMs with a straight face one day to telling a borrower to default -- and buy! -- on the next. Lenders are taking steps to keep this from happening: the Journal notes that Fannie Mae is about to put policies in place that limit what a borrower can buy if they already own a residence; and IndyMac requires borrowers buying a second home to demonstrate income/resources to pay on both mortgages. What's really hilarious, with that in mind, is this little tidbit, buried in the article:
Realtors say the new guidelines could put further pressure on sales ...
To which we can only say this: Production is dead! Long live production!