Commic about foreclosures.
Homeowners are finding creative ways to deal with the recession. CC by Cartoosh/Wikimedia Commons

Getting a second mortgage-guaranteed loan to purchase a second home before strategically defaulting on the first mortgage is called “Buy and Bail” – and is becoming a popular option. The action is still very common, despite the fact that Fannie Mae and Freddie Mac have tried to limit the practice. The only thing some borrowers could be charged with is fraud, but Buy and Bail is not in and of itself an illegal practice.

How Buy and Bail works

Some mortgage brokers are calling some emergency loans “Buy and Bail.” In a Buy and Bail scenario, a second mortgage is taken out to buy a second home. Once the family has moved into the second house, the homeowners quit paying their first mortgage. This means that the first house is the victim of strategic default. By doing this, homeowners can save money with a less-expensive mortgage before they ruin their credit with the default.

The impact of Buy and Bail

Most often, Buy and Bail is an option that only wealthy individuals can take.

Part of the application for a second loan usually includes proving that the applicant can pay both mortgages for a long period of time. Both Fannie Mae and Freddie Mac require that borrowers prove they can pay both mortgages for six months or more. Even with these protections, most Buy and Bail first homes are ending up in default. The end result of this is that the housing downturn continues. Buy and Bail homes are, most often, worth $417,000 or more – meaning they will be on the market for much longer.

The legal status of Buy and Bail

It feels like Buy and Bail should be illegal; it is basically an overnight cash advance just for the well-off stuck in a bad mortgage. The only thing that a person could be prosecuted for, though, is lying on an application. If borrowers are entirely truthful throughout the entire loan application process, they cannot be prosecuted for Buy and Bail. If a borrower is 100 percent truthful throughout the entire loan application process, the only thing that happens to them as a result of Buy and Bail is their credit rating drops for seven years.

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