In Foreclosure? Buy a Second Home

For more and more people, "buy and bail" is the answer to home foreclosure.

February 18, 2009, 11:43 PM

LAS VEGAS, Sept. 7, 2008— -- Just a few weeks ago Jim Eble lived in his dream home in Las Vegas. It now sits empty because he owed the bank more money than the house was worth and the bank was threatening foreclosure.

"It's tough to come back here now," said Eble, looking at his dream house.

But Eble has found an answer to his financial problem: buying a new home. Although it's hard to imagine with one house near foreclosure, his solution is to buy a second house at a bargain price and simply walk away from the old house.

"Buy and bail" is becoming a growing trend in the hardest hit real estate markets.

Eble owes $334,000 on his first house, which is now worth only $219,000 and is still dropping in value. He has an adjustable rate mortgage that has doubled to more than $4,000 a month, more than Eble can afford to pay.

So before the bank forecloses on his first house he is taking advantage of falling real estate prices to buy a new home for $285,000, with a fixed rate mortgage he can afford. Once inside the new home, he can either sell the first property for a huge loss to the bank or walk away completely and let it slip into foreclosure.

This exit strategy only helps homeowners who can afford the down payment on the second home as well as carry both mortgages until they are in their new home.

Like Jim Eble, homeowner Kim Hinske just bought a new home -- for $280,000 -- as a way to get out of an expensive mortgage.

"Yes, it's a scary thing, but I know that my family's taken care of 'cause we have another house, a bigger house and a mortgage that's less," Hinske said.

For those who can "buy and bail," it is an attractive option. Why struggle and pay an increasingly unaffordable mortgage on a home that has lost significant value?

"We have to rebuild our credit, that's the only downside of doing this," Eble said.

One problem with the buying and bailing solution is that foreclosure ruins a person's credit rating. However, the people who are willing to walk away from a mortgage say that even the high cost of ruined credit is worth it because they face few attractive alternatives.

So how do people get a loan for a new home when they are barely making payments on their current one? In many cases they tell the bank they plan to rent out the first house, or they put the second mortgage under a spouse's name.

"Desperate people do desperate things and again, we're at a point now where the relationships between the borrowers and lenders really seem to have devolved into a survival of the fittest mode," said Rich Sharga, a spokesman for RealtyTrac, an online marketplace for homes in foreclosure.

However, buying and bailing is not for the most desperate. For homeowners who may have lost their job or are behind on payments, it is doubtful that a bank would give them a loan solely to purchase a new home.

Some lenders call the practice deceptive, even fraudulent, and they are fighting back. Fannie Mae has already imposed stricter guidelines for approving a second mortgage and other companies are expected to follow.

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