Before I Strategically Default, Can I Get A New House? Pwease?

Old news: homeowners strategically defaulting on their loans. New news: They first want to get financing for a new house.

It’s called “buy and bail” and people are trying to get rid of houses that are worth less than their mortgage and get a new one before their credit is ruined by the default.

`Buy and Bail’ Homeowners Get Past Loan Restrictions [Bloomberg]

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  1. WagTheDog says:

    They are getting into new car loans as well, before their credit rating tanks. I know someone who is doing exactly that.

  2. FatLynn says:

    Look, we all know the laws are written to heavily favor the banks, so if you can do this and get away with it, good for you.

    • spinceoli says:

      This is a ridiculous statement. One of the main reasons we’re in this entire recession is because banks made unwise loans to people who weren’t able to pay them back.

      The buck doesn’t stop with a bank, they use your money to make loans and when they go bankrupt or need bailouts, it’s you that foots the bill.

      • dbeahn says:

        Right. The banks fucked a bunch of people over (and the rest of us, too) by making bad business decisions. They intentionally set these people up to be fucked over.

        If they can give a little back and fuck the banks over, especially after the banks got 700 billion of our tax dollars, I say good for them.

        • spinceoli says:

          You don’t understand. The banks WERE fucked over because of their poor business decisions, and we bailed them out. You’re just asking to repeat history here, except now it’s with malicious intent rather than just ignorance of one’s own financial situation and taking loans one cannot afford.

          I’m not a fan of the banks at all, and I do think they were absolutely responsible for using these loans as securities vehicles to be sold for profit (as opposed to traditionally making money off of the loans themselves), but let’s get something straight here – nobody forced these loans on these people – they came in themselves to ask for them and bought overpriced houses at loans with monthly payments far beyond their means.

        • craptastico says:

          the gov’t didn’t give the banks anything. that bailout money was in exchange for an ownership stake in the banks, so in essence these people are trying to screw all of America’s taxpayers, since they’re part owner of the bank

      • stock2mal says:

        So why did the banks make “unwise” loans to people who couldn’t pay them back? I guess they suddenly felt that everyone should be able to own a house and wanted to help them out with it? Dumbass.

        • spinceoli says:

          Of course not. They made these loans to people because someone on wall street realized that you can make an investment vehicle backed up by mortgage payments. Because of the housing bubble, these mortgage backed securities at that time were incredibly hot and quite profitable as they traded hands.

          1. Give out risky loans and non risky loans.
          2. Package risky loans with low risky loans and create a security
          3. Sell shares of the security. Profit off of selling this.

          This worked for awhile of course, until the housing bubble burst and the values of the houses no longer actually backed up the values of the securities themselves, so people who were buying and selling these shares of the securities found themselves with a bunch of worthless assets backed by houses that were worth less than the loans given out on them.

          It was unwise because it was definitely a short term profit making operation at the expense of the economy in the long run. When the music stopped playing, the banks with the loans still in their account books were caught without a chair.

        • craptastico says:

          don’t forget the Congressmen that basically forced banks to loan money to people with no money because it was unfair for poor people to miss out on the American Dream

          • weestrom says:

            I call shenanigans on your propaganda. The loans made under the Community Reinvestment Act outperformed the subprime “Liars Loans” that caused securitized debt crisis. This is because these loans were made with HEAVY oversight and regulation, whereas the subprime garbage was a free-for-all. The default rates bear this out.

            http://www.jchs.harvard.edu/research/crareport.html

            Stop the right-wing, blame-the-government mentality and realize that Free Markets aren’t the savior of all, in many cases they are the problem (since markets with artificially pegged currency values can never really be free markets).

            • craptastico says:

              but they all pushed prices higher than the market could sustain. it’s all part of the foundation for this house of cards we call a real estate market. i don’t know how you gleaned that i thought free markets are the savior, as the free market for loan securitization is largely what caused this mess. you can call me right wing if you want, but both parties were compliant in eliminating Glass Steagall and that’s at the heart of all of this.

              • weestrom says:

                You began the conversation with outright false propaganda that originated from the free-market cheerleaders as a scapegoat that would place the blame for the housing crisis on both the government and the poor. Neither were the case, in fact (as you graciously concede above) the wholly unregulated secondary debt securtization market was solely to blame. No one was forcing anyone to make subprime loans. Those loans were originated in whole to fill the insatiable demands of an unregulated, out of control “free market”. To blame the CRA lending is preposterous and disingenuous as the amount of capital in that system vs the subprime loan paper is orders of magnitude different (remember: CRA loans are for poor people and cheap houses, subprime loans tended toward the $500,000+ McMansion). Who do you think is defaulting more, and which default has a greater impact on the market?

      • jvanbrecht says:

        I kind of disagree with your statement, but only a little. While yes, the OP’s statement reeks of hating the financial institutions, he has a point.

        As for people who cannot afford the houses they bought, well tough, you made the choice to purchase a home, live with the consequences.

        I on the other hand, easily afford my home payments, in addition to car payments (which amount to around $1k a month between car and insurance, not including the $100 a week I spend on gas). At the same time, my wife and I want to move, not because we hate the fact that out house is now worth $50 to $100k less then we paid for it, but because we want to get the hell out of the area. There is no way for us to sell the house (renting might be an option…), so that leaves us in a bind.

        The option for us (no, we are not doing it, but I have contemplated it), would be to apply for a mortgage (and there is no guaranty I would get it either) for a home in some place we like, and then let the bank have out old home, sure we get screwed, but we have everything we need/want mostly, so while the banks are screwing people every which way they can, I don’t see a problem in screwing the bank if it serves my own interests.

    • WorkingDad says:

      This whole it’s-ok-if-you-can-get-away-with-it thing isn’t what I’ll be teaching my kids.

    • sleze69 says:

      While I disagree with you that the laws are written unfavorably against the consumer, I think that if the government wants to regulate this, they need to also apply this to businesses – who do this all the time.

  3. GMFish says:

    I know someone will complain about borrowers who are not living up to their obligations by defaulting. That’s BS.

    It’s not a moral issue, it’s business, even if you’re a consumer.

    Rich people and corporations do it all the time. They look at the bottom line and decide that such and such is not profitable and they cut it. Thousands may lose their jobs. People may lose money. But it’s business and it’s ok. No one ever seriously expects a business to continue an unprofitable course of action when there are legal ways to avoid the course of action.

    But for some reason, when a middle class or poor person does the exact same thing, decides to legally cut his or her loses and back out of an unprofitable endeavor, suddenly the morality police show up and attack.

    It’s perfectly legal to default on a loan as long as you accept the consequences that follow. If that subjectively bothers your precious sense of morality, who gives a rat’s arse? I sure don’t.

    • VA_White says:

      Move over. I’m sitting on this bench with you. I completely agree that it’s perfectly ok to crunch the numbers and use the existing banking structure to your economic advantage.

    • WorkingDad says:

      What a slippery slope this is.

      Is shoplifting OK because paying for things is unprofitable?

      • sonneillon says:

        No but a grocery store does not contract with you saying if you don’t pay for the groceries because they are unprofitable we’ll reposes your tomatoes. The bank does. They wrote the agreement.

      • GMFish says:

        God, learn how to make an analogy. It’s perfectly legal to default on a loan. Shoplifting is illegal. They’re not even remotely analogous.

        • WorkingDad says:

          I thought we were talking about what’s moral, not what’s legal.
          Or are you saying you’d shoplift if there wasn’t a law against it.

    • Gnort says:

      I try to take my word seriously and not go back on it. Having said that, my mortgage is a SECURED lone (i.e. I fall behind, they take my home, because it’s theirs). That is just how the lone works. I have no issue with walking into the bank and giving them my keys and telling them I’m terminating our agreement as per whatever clause covers it.

      However, I don’t agree with people intentionally stopping their payments but continuing to squat in a house they effectively don’t own anymore. If you know you can’t make payments and probably won’t be able to in the future, make other living arrangements quickly and walk away (I know that’s harder to do than it was for me to type it).

    • chefboyardee says:

      Count me in agreement with you, GMFish. I was on the fence until I read your very logical argument.

    • AstroPig7 says:

      The issue is less that people are defaulting on their loans and more that they’re gaming the system to get new loans before their credit tanks. This is disingenuous and frankly immoral. If you’re going to walk away, then accept the consequences, one of which is a giant blow to your credit.

      • Conformist138 says:

        Don’t forget, these are people who are proving they will cut and run, the reason why shouldn’t matter. These people, while looking out for themselves, are dangerous to everyone else. Just like bigger businesses or richer people, it’s not just about morals, it’s about what is going to send us into a death spiral. Foreclosures hurt the surrounding neighborhood, no one wants to be in *that* area where everyone seems unable or unwilling to pay their bills. Banks spend money to get less of a return and there are courts involved. This isn’t an acceptable way of doing business and I don’t let the law dictate my ethics (even if it’s legal to do something, i don’t have to do it).

        And, just because there is a consequence, doesn’t mean the action is ok. Punishment doesn’t negate moral or ethical responsibility. The punishment is there to prevent such measures and the more they are abused the more the strings will be tightened for everyone’s protection. Then we get complaints of the government being a nanny. In the end, be it a company, rich person, poor person, whatever: being a good person still requires looking past the bottom line.

    • photoguy622 says:

      If you can afford to make the monthly payments you should. If you want to buy a new house, do it, but get a renter in the upside down house first. This way you can collect rent and only have to make up the difference, if any, between the rent and the mortgage payment.

      Granted it’s a risky proposition, but at least you’re not foreclosing. While you might be able to get a new mortgage before you tank your credit, that does not mean that future employers, creditors, and insurance companies won’t ding you for it. Besides unless you are severely upside down you should be able to sell it and break even in a few years.

      In the end you’ll have kept your word (if that’s important to you), your credit will still be intact, and your neighbor’s property values won’t go down as a result of your foreclosure.

      Besides, the whole “if the banks do it, then I can do it to”, is just justifying bad behavior. Don’t we abhor the business practice’s of most bank on this site?

  4. pete says:

    Oh this is gonna be a good one.
    *makes popcorn, reclines chair*

  5. pecan 3.14159265 says:

    Whoa, holy stretching comments box! WTF?

    • Loias supports harsher punishments against corporations says:

      I can’t even see the article, picture, or link. Just the tages and comments.

  6. Phil Villakeepinitrreal says:

    I think someone messed up the coding in this article somehow. There’s nothing but a grey area with some links, the twitter banner, and the comments…which are full-page wide.

  7. astraelraen says:

    We purchased a new home in March of this year and still owned our old home.

    All the banks’ we went to made purchasing a new home while you still owned an old home fairly difficult.

    I’m sure it is possible to “buy and bail,” but in our experience the mortgage officers asked enough questions and looked for enough documentation it would have been fairly difficult to do unless you had significant, proven financial reserves.

  8. sonneillon says:

    Although if their credit is ruined by a foreclosure after they are in a new house and the previous bank sues them for the difference they might want to consider a restructuring bankruptcy and only pay 10 cents on the dollar for most of the debts. At this point you really do not have much to lose anyways.

    Really though. The banks with their teams of lawyers wrote the contracts and dictated the terms. The contract says if you default you lose your house. You are fulfilling the contract that they wrote for you. They have no problems getting rid of your loan if they think you are a bad investment and I have no problem getting rid of my house if it becomes a bad investment.

  9. Oranges w/ Cheese says:

    This really sucks, but it seems kinda shady to me.

    • sonneillon says:

      It is legal and the banks are the ones who designed the contracts that are the most favorable to them. It just happens that during a downturn when houses depreciated in value that isn’t a good contract for the banks and they cry about morality, but when things are good they have no problems taking your house as fast as they legally can.

      • YOXIM says:

        Plus the mortgage being insured so not only does the bank get your house, but they also get the insurance money because you didn’t pay your mortgage. The morality police can kiss my ass. When money enters picture, it’s strictly business for me, and I do what I can to make sure that at the end of the day, I come out on top. This is the same thing I expect out of everyone I deal with. If you don’t look out for your own best interests, no one else will.

        • SenorBob says:

          A very small percentage of loans are insured. If you put 20% down or have a second lien, there’s no insurance.

  10. KyleOrton says:

    From the article: ““It ultimately leads to higher costs for everyone as investors and others look for ways to price in the risk.”

    The only way to “price this in” would be to insist on higher prices for bank owned properties. And there’s too many houses on the market already (and many more waiting in the wings) for them to dictate prices. The moral argument is their best effort to get the masses to take the loss rather than the bank.

    • diasdiem says:

      Couldn’t a lot of this mess have been avoided if instead of turning around and trying to sell all the foreclosed properties and saturating the market, driving down prices and inducing people to strategically default, the banks had just hired property management companies to lease out the homes?

      • sonneillon says:

        Banks are risk adverse by the nature of their business and leasing a property carries a higher risk than selling it. Also some states have laws to prevent this sort of thing.

        • diasdiem says:

          Okay, state laws I can see, but I fail to understand how even with expenses (taxes, maintenance, insurance) an investment that over a long enough time period will pay for itself, after which it generates profit, is more risky than selling it for a definite and often large loss. I mean, when they made the loan in the first place, they were entering into an investment that they weren’t going to get a full return on for many years anyway.

          The only difference between the arrangement before the default and after the default is that the bank would be taking on the burden of property taxes, insurance, and maintenance. But it would still be money coming in, eventually paying off the remaining cost of their investment (which would only be the amount of the original loan that hadn’t been paid yet.) At the very least it would allow them to sell the homes gradually, so that the prices would not be driven down so rapidly.

          • qwickone says:

            If they keep the house, then they have a long term asset now, which is offset by a current liability (the outstanding loan is now the Bank’s liability). It becomes a current liability because the Bank has “borrowed” the money from it’s depositors and deposits are considered a current liability. I’m not 100% sure on the current liability thing, but I’m sure on the LT asset.

  11. Consumeristing says:

    From the article, it doesn’t sound like it’s illegal.

  12. sirwired says:

    When we bought a house before moving, we were able to prove to the bank we had sufficient resources to carry both loans at once. Since the crash, obtaining a “bridge” loan is MUCH more difficult. If you are well off enough that you can get the bank to do this, great. But most people thinking of a strategic default aren’t going to be able to get the bank to sign up to this plan, since the whole reason most (if not all) people strategically default is because the current mortgage is a real PITA to pay every month.

    I’d say the number of strategic defaulters that can afford to pull this off is pretty low.

  13. diasdiem says:

    If you’re actually able to get financing for a new house before you strategically default on your old one, why not rent your old one out instead of defaulting? If you manage to lease it for enough to cover mortgage payments and property taxes, and any maintenance the tenants might need, at least you’d be able to keep your credit intact, and wait out until the market improves.

    • Jackmojo says:

      Not realistic in most locations, unless you bought your house ten-ish years ago or put a very significant percentage down. The rent-to-buy ratio is too off kilter (especially from the housing price peak of a few years back) in most areas.

    • Buckus says:

      Well, let’s see how that works out in my townhome complex. My payment plus HOA plus taxes plus insurance is $1600/month. Two units similar to mine just sold for 80K and 68K, respectively. On a normal mortgage, those monthly payments would be around $500 – $600 monthly. Same HOA, so figure $650 – $750 monthly. See the problem here? Even if I were to rent my place for $1000, I’d be upside down monthly by $600. And even a conservatively positive outlook shows the prices not recoving for 10 – 15 years. That means that, all other things being equal, if I were to rent the townhouse, I’d pay $72,000 – $108,000 in that 10 – 15 years just for the privelege of a good credit score. So the question is, if you could put a price on your good credit, is it worth $72,000 – $108,000?

  14. Bob Lu says:

    If you can get a new mortgage for a new house, without lying, when your existing mortgage is underwater, it should not only be legal, I don’t even see how it is morally wrong or bad.

    However do banks usually approve mortgages if they know you are already underwater?

  15. Spellchk says:

    This is what I am doing right now actually. Me and the Wife bought our house a little over 9 years ago. Got it at a pretty decent price too. However 9 years later we would like to move closer to family/work and were looking to sell our house. Come to find out that its now worth about 40k less than what we paid for it 9 years ago. So our choice was to bring 40k to the table when we sell or to buy another house and Bail. Only difference here is that the house is only in one of our names. So when we do bail only one of our credits take a hit. At the time my credit was much lower than hers but we are now both in the upper 700’s so it wasn’t hard to find a bank to front the money.

    Our new bank also isn’t stupid and read between the lines on what we were going to do. However they seem to not have any problems with it. There are those who say that what we are doing is not moral or ethical and I would have to disagree. I see no reason why giving the bank back our house (in fine order I might add) is a bad thing. I see no reason why I, as a private citizen, should not do what I feel is best for my family.

    • jeepguy57 says:

      Absolutely – you need to do what is best for your family. Teaching your kids about personal responsibility must not be on your list.

      “Hey kids, whenever things in life get tough, just walk away. No need to face the consequences of your decisions. Let someone else deal with it.”

      • weestrom says:

        He IS facing the consequences of his decisions, as detailed in his mortgage contract and state laws. He is losing the house, turning the collateral for the loan back to the bank and taking a major hit to his credit. Not facing the consequences would be to hole up in the house and stop paying the loan, refusing to surrender possession of the premises.

        • Spellchk says:

          You are quite correct on that. While I don’t really care if someone were to do that I will be making arrangements with my bank to pick up the keys and notifying the city that I will be leaving.

        • jeepguy57 says:

          He is not losing the house. He is intentionally dumping it on the bank so he doesn’t have to deal with anymore.

          He borrowed money that needs to be repaid. He is not paying all that money back. Sure, he is turning the house over to them but its not enough to cover his debt. That is unethical, plain and simple.

          I really can’t see how anyone can say it is otherwise. Keep drinking the kool-aid and telling yourself it is all good. But its just another example of someone not accepting the responsibility they agreed to one – paying back the debt.

          • Spellchk says:

            You keep talking like these deals are done with a handshake over a shared drink after we talk about the “good old days”. This was a contract, it has their obligations my obligations and consequences if either of us withdrawing. This is a financial decision pure and simple. Made in a moral and ethical vacuum as all good financial decisions should be. If you wish to inject some high moral or ethical code into your dealings that’s your choice. But others like myself instead strive to give our families all that we can and do it without ego or pride.

      • Spellchk says:

        Heh, your post while amusing is off base. I am bound by the contract that was signed. Nothing is happening outside that. The lesson my little girl will be taught is when you agree to something do it. The house is now the banks. If there is any money lost on the sale the bank will file that as a loss with the IRS. The IRS will then consider that money income to us and thus we will pay taxes on it.

        Another thing I hope to teach my daughter is that opinions are like assholes, everyone has them and they often stink.

    • peebozi says:

      You’re simply abiding by the contract terms.

      Why do so many people hate America, the free market and contract law?!?!

      • Spellchk says:

        I think it has its roots in a bygone time in rural America. Where you would get a loan from a community bank or a personal loan from a community member. So in a way you are getting it from a friend. In that instance I can see it being about “giving your word”. However in the modern world it really is an outdated way of thinking.

  16. balthisar says:

    Heh, I thought of this for a few minutes. I bought my current house with no contingencies on the previous house, because maintaining excellent credit can do that for you. I’m absolutely certain that I could do this, too. Except, (a) I don’t want to tank my credit, and (b) Michigan is not a non-recourse state, and the bank would be stupid not to come after me.

    Uh, speaking of that, if any of you do do this, make sure you’re in a non-recourse state first.

  17. tomok97 says:

    Can someone that can actually SEE this article please repost the link for those of us who would like to read it?

  18. Buckus says:
  19. jeepguy57 says:

    The principle is the same as going to a casino, signing a note to borrow some money, losing it and then not paying back the casino. Did the casino force you to sign that note?

    No, these people took on a risk that didn’t work out. But because this is America, we can just walk away from our responsibilities, rather than dealing with them.

    Sure, the banks didn’t play fair either, but I don’t recall banks forcing people to buy houses they couldn’t afford.

    • Spellchk says:

      No, no its not. Its more like going into a store and buying something. You and the store agree on the terms of sale and then the store says that if you cant pay for it you give it back and they resell it for what they can get for it.

      Your example is missing the collateral. Not just America BTW, its just about anywhere in the modern world where these kind of contracts exist.

    • Buckus says:

      I don’t recall the government being forced to prop up the failing banks, either. But they did. And they took the money and hid it in…wait for it…Treasury Bonds. My head just assploded.

  20. SlappyFrog says:

    This isn’t “strategic default”….this is gaming the system and shows that these people have the ethics of the bankers they are trying to screw.

    • Spellchk says:

      As one who is doing this I would agree with you on that. Though I would have to ask you why I should hold myself to a higher standard than what the contract dictates?

    • Buckus says:

      You mean like processing debit card purchases and checks highest to lowest so that you pay a overdraft fee for each little purchase. Or charging a $35 overdraft fee for a $4 coffee? Or taking out insurance on the mortgage portfolios if they were to decline in value (read: AIG)? Or taking the bailout money and investing in treasury bonds, resulting in banks being paid to take money (interest earned on treasury bonds, no interest bailout loan from fed)? Or putting people into adjustable-rate mortgages when they qualified for less-risky fixed-rate? Or into no-doc loans when they were more than qualified for conventional financing? Or paying off the lowest-interest balance on a credit card first? If gaming the system is good for the banks, it’s good for the consumer.

  21. Difdi says:

    Universal default will eat these people alive.

  22. aleck says:

    It is pointless to argue the morality of the story, people will justify pretty much any behavior. However, it is clear that the laws need to be strengthened to prevent this from happening. Stronger recourse clauses – the ability of a lender to sue the borrower for the difference would do the trick.

    • Spellchk says:

      You might think so but not quite. See if they try to do that then the borrower would just declare bankruptcy. Wouldn’t hurt since the you have already taken a massive credit hit. No I’m afraid there is no real way to curb this kind of thing. Ive seen very few laws that cant be circumvented by a clever accountant.

      No the only way to avoid this sort of thing is for banks to quit the risky behavior. No loans to those who cant pay = no mass foreclosure = no sudden and dramatic drop in housing prices = people like myself who can pay for houses don’t have to pull this crap when the price spirals down on their house.