Wednesday, June 11, 2008

"Buy and Bail"

From the Wall Street Journal:

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.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.
Ms. Augustine, the Sacramento day-care provider, became a first-time homeowner in November 2006 by taking out two loans with nothing down to cover the $426,000 home purchase. With her home valued at about $220,000 now, she is actively looking in nearby communities for another one to buy before the bank forecloses on her current home.
From the Wall Street Journal:
The Sacramento Association of Realtors says that a whopping 65.5% of 1,654 homes sold by Realtors in May were bank-owned, foreclosed, homes. The median sales price in Sacramento County and the City of West Sacramento May was $230,250, down 34.2% from a year ago.
Sacramento may be leading the nation in the sheer percentage of lender sales, which are known in the business as “real estate owned,’’ or REOs.
From the Sacramento Union:
The truth is that...Congresswoman [Laura Richardson] is a failed speculator. She flipped houses as the housing bubble was popping and her bets have come due. Now she wants some sympathy and, yes, a bailout. If Congress and the White House decide to rescue defaulters like Richardson, it will be a “life-changing moment” for the nation. We will have rewarded those who carelessly leveraged themselves during the housing bubble at the expense of those who prudently avoided mortgages they could not afford.


Buying Time said...

While I know there is a big element of personal responsibility in all this....I still can't help but wonder, every time I read these stories....Why did the bank give these people money? and why do they continue to do so?

These folks are acting very rationaly given the incentive structure. Secure 100% financing. If home appreciates, bank the money and all the better. If not, hand back the keys and go get a different home with 100% financing.

Of course I can't complain too loudly, we bought our first house in 2002 with 100% financing (albeit with documented income and spotless credit).

Patient Renter said...

Why can't the WSJ or some other big publications grow some juevos and write something like the Sac Union piece? It's nice to see someone telling it like it is, but sad that nobody will notice.

Why did the bank give these people money?

Because they planned to, and mostly likely did, sell the loan immediately afterwords.

Buying Time said...

"Why can't the WSJ...grow some juevos"

Cause they mainly write for all the banks and investors that are getting hosed. Don't ask...don't tell seems to be the prevalent strategy....perhaps they are hoping no one will notice how bad it really is.

Diggin Deeper said...

It's sound like fraud, doesn't it? If so, she'll trade her new digs for a and 8 by 8 cell with company.

Seriously, they print this publically and she really thinks she can buy another home without reprisal? This isn't even borderline stupid

anon1137 said...

I think these people with exploding ARMs, like Ms. Augustine, who are walking because they can't afford the payments are smart and lucky. A difficult decision is being made for them.

But for every borrower who can't make the new payments, there may be three or four or five who can make the payments and continue to do so even though they're $100K, $200K or more underwater. I think it's much better to have the rug pulled out from under you quickly - WHOOOSH! - get it over with, move on - than to go on year after year after year paying more and more as your home value slowly sinks. Pretty soon, 5 or 10 years have gone by, you've been working your butt off and putting all your earnings into your mortgage, and there you are with nothing to show for it.

Diggin Deeper said...

I guess this takes homeownership and fiscal responsibility to a new level.

If you don't like what the market's done, buy first and then bail from your loser.

Nope, something tells me that this lady gets hammered if she tries to pull this off. Afterall she was "smart" enough to speak to a reporter about her intentions.

James said...

"If Congress and the White House decide to rescue defaulters like Richardson, it will be a “life-changing moment” for the nation."

This is a great story. If you are an investor you should take full responsibility. The definition of an investor is someone who puts capital at risk for some expected return. I stand firm on my feeling that no investor loan should be written as non-recourse. No walking away from a bad investment.

As for Ms. Augustine; seriously, how in the hell are the banks underwriting this stuff. How can she possibly cash flow two homes if she can't afford one? They know what is going to happen to the holder of the existing debt. Is there no fiduciary responsibility to protect the borrower from default and the existing lenders? I hope she know she will get hit with a huge tax bill for the difference in what her home sells for and what she owed. Hard to discharge this in BK. With that big of a loss to the bank, she will be on a 7 year payment plan paying nearly the same payment a month to the BK trustee as she would have on the home. Now she will lose the new home as well because she will not be able to handle all the payments.

pavlovianvestor said...

Buy and bail - that's awesome. Finally a term for what I've heard is happening. I heard from a friend of a friend that several doctors who are upside down on their homes (current FMV of around $550k), took out another $1M under B of A's doctor loan program, used the money to purchase another home, and walked from the home securing the $1M loans before anyone knew to ask any questions. I hear that this is a well known scam amongst certain circles in the nursing community too. You'd think it has mortgage fraud written all over it, but I guess it's not illegal unless you get caught. Cashing in on your home with your good credit and walking is WAY better and easier than any bankruptcy scheme. More power to 'em. The scamming goes all the way up and down the socio-economic ladder.

Sold in '05 said...

For anyone who thinks that there is still justice to be found in a tax penalty as a punishment for anyone who dares to get out from under these overpriced piles of stucco… Check out the provisions of the "Mortgage Forgiveness Debt Relief Act of 2007". Basically, this act says that a short sale or foreclosure or deed in lieu that happens on a primary residence, of value less than one or two million dollars is TAX FREE as long as it is done before 2010.

Sorry, you'll just have to keep chewing those sour grapes; our WSJ poster girl is not going to suffer anything worse than a foreclosure on her credit report.

IMO, what she is doing is not fraud as long as she doesn't try to hide her current mortgage from her next home lender. Why should a new bank turn her down? There's no way that she will willingly default on the new house because she will have a foreclosure on her record and not be able to buy another. She will be good for at least three to five years and this time, they will not loan her more than her income properly supports.

Check out MLS# 80002287 in Roseville. I know these people, and they are doing the exact same thing as the WSJ lady. The house was bought in Oct 2005 for about $510k. Now short sale listed for $300k. They have already moved out and are waiting for their NEW house to be finished in West Roseville. Once they get their new keys, you can bet that any attempt to short sale will be ended and the old keys sent back to the bank.

The real upside to this behavior is that it helps values return to proper levels MUCH faster than if all these upside-down buyers kept their pride intact and instead went down with the sinking ships, er... poorly built track houses. The banks aren't holding onto these assets that are rapidly loosing value, why should the individuals? This may be the first time in history that the little guy has the chance to screw the big guy (assuming that the little guy doesn’t get his taxes raised through the roof to pay for the big guys’ bailout).

David said...

I always read with amusement all the condemnations of people like the lady in the article. The captains of industry do this kind of stuff all the time and half the time it's legal.

Maybe buying the original house wasn't a smart idea, but everyone was saying buy, buy, buy. Yes, I know the blogs said otherwise, but in all honesty how many people get their info from the blogs. Just remember three years ago if you can, your friends, the media, the realtors, your coworkers, all said housing is a good investment. So can you really blame her for trying to get out of this with the least amount of damage to herself?

While I take some satisfaction that I was "right" about housing I can't blame this lady very much. At least she isn't stupid enough to think that she should throw all her money away trying to save a loosing proposition. I can't say that most people would be smart enough to know that it is hopeless to stay in the original house. I agree with one poster better to get it over in one quick swoosh.

Bob said...

"Check out the provisions of the "Mortgage Forgiveness Debt Relief Act of 2007". Basically, this act says that a short sale or foreclosure or deed in lieu that happens on a primary residence, of value less than one or two million dollars is TAX FREE as long as it is done before 2010. "

Just wanted this to be emphasized again, in case some didn't catch it in SO5's original posting. These people have nothing to lose.

Everyday, instead of being increasingly happy that I was 'right' about the housing bubble thanks to blogs like this one, I instead feel more and more like the sucker.

lexi said...

So sold in 05 and Bob do I get
this correctly? You buy for
let's say 350k run up the balance
to over 600 by refinancing during
the boom and use some of the money
on your house but the rest on
yourself via cosmetic surgery plasma tv's and the like and you
short sale and walk away scott free? Just want to make sure I'm
understanding this correctly as I know of someone who did the above.

Diggin Deeper said...

I guess if it's legal according to the guvment, it must be ok...With laws like these, the real estate people are right, it's always a good time to buy. You have no fiscal risk, no market risk, what's not to like? Might as well do these deals on the back of a cocktail napkin as mortgage contracts are basically worthless.

The outcome has already been alluded to. All the rest of us get to pay for all rest of those that choose to "buy and bail" ...whether in the form of higher taxes, higher interest rates, higher downpayment percentages, higher fees, or all the above.


So, the Congresswoman will vote herself some sort of debt forgiveness to get out of paying for her failed flipping business. You gotta know that going into this she knew she had nothing to lose since she understood the government would bail her out, espeically since she works for the government and can vote for that. On top of that, she makes a Congressional salary of $169,300 plus benefits. So that's what, 3-4 times that of the average American salary. This wasn't good enough so she just had to flip houses to make ends meat? Plus she gets a phat pension, which will be about 80% of this highest salary in Congress for the rest of her life. Not a bad scam if you can swing it.


David, so no responsibility here? If your peers tell you to do it over and over again, it makes it right? How far can we take that? So would you call her stupid if the home she buys now that's "cheaper" than the one she just skipped out on also falls in value? How many times does she get a second chance, all the while the rest of us have to pay for her actions when she loses but when/if she wins, she keeps it all to herself. I want some of what you're smoking.