Nice to hear from you.

With the amount of fraud that has been originated by both lender and borrower, I seriously doubt that your odds of prosecution are very high. While I admit to being ignorant of any specific laws that may pertain, it would seem to me that someone that buys a second home, makes a few payments on both, and then defaults on the previous mortgage (which might be several years old) would be difficult to prosecute for fraud.

The new lender is going to be happy that they are receiving payments in a timely manner, and the old lender is going to have a rough time prosecuting fraud for an action that takes place several years after the loan was originated. They would essentially have to prove that Joe Hippen and Mary Trendy conceived of a plan to:

sign a mortgage for a house
live in it for a few years with a flawless payment history
buy another house
make a few more double payments
default on the first loan

They have every right to default on either loan and give the house back to the lender under NJF. The bank has to prove that their intent, at the time of contracting the original mortgage, was to default.

What if the Hippen-Trendys have some form of “life event” that strains their ability to float two payments?

I will say that if they have a dummy-lease that was used to defraud the lender (either one), they risk a very easy prosecution for document fraud.

“Buy and bail” is just one of the circumstances that bankers, whom have lived in a 40 year bull market in real estate, failed to protect themselves against. I also think their case-load will overwhelm them. They can’t even afford to sell the homes they have taken into REO in most of California - crazy as that sounds.

How many homebuyers have pulled the old trick of having two incomes to “qualify” for the loan, only to have the Mrs. get pregnant and quit her job within the first year? Most of my friends did that when we were in our 20s and 30s. I came to believe that the practice was expected by the lenders.

Again, foolishness and carelessness has always been liquefied by a rising market. Not so anymore.

I think the comment is better than the article.

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Where the visitors write better than the blog owners!

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.

-Michael Douglas as Gordon Gekko, ”Wall Street”, 1987

Permit me to disagree with Mr. Gekko. Greed motivates, but the motive lacks the moral compass needed to function in a society based upon honor, law, and respect for your fellow man.

The point is, ladies and gentlemen, that greed, for lack of a better word, is flawed. Greed is vacant; greed fails and eventually destroys the original goals of creativity and exploration. Greed clouds judgment; infects and corrupts the essence of the human spirit.

Apparently, the ugly reality of the backside of the housing bubble is starting to settle upon our community. As someone that has followed the rise, peak, and decline of the national housing bubble, I am well acquainted with the practice of “buy and bail.”

First, the legalities of this should be thoroughly explored with competent legal council, prior to considering such a move. In the above example where a potential “buy and bail” participant intentionally commits a fraud (bogus lease) to secure funding for a new home, the full weight of the law should be brought to bear on all parties that assisted in committing that fraud. Certainly the prospective landlord should get hit first and hardest. The willing “renter” for the property should also be charged with some form of fraud.

As far as the real estate agent goes, I’m not familiar with the legal requirements to disclose fraudulent actions by their client to the various supporting parties to the transaction. Obviously, the agent could tell the loan officer of what he believes is a fraudulent lease, but if he is mistaken, or the client covers his tracks by having the renter actually occupy the property, the agent and brokerage could easily open themselves to a lawsuit.

As a rule, it’s best not to have business relationships with sleazy people.

I wouldn’t be quick to fault a real estate agent, unless it was the agent that suggested the action. At some point, you can’t be responsible for everything someone does. RE agents should match buyers with sellers and receive their commission, not play hall monitor for everyone involved.

Is it ethical to represent someone suspected of “buy and bail?” I guess that depends on how overt the fraud is. If the client expressly claims that he is trying to bamboozle the new lender, by misrepresenting his creditworthiness (knowing that he plans on defaulting), I would not continue. This is a small community and people have long memories. If the buyer acts like he might “buy and bail” but says nothing, is it the responsibility of the agent to confront him? What if the client lies? After all, anyone that can “buy and bail” is certainly capable of lying to cover the scam.

Enter the banker. To me, the banker is the party that needs to bring a well-tuned “BS meter” to the transaction. After all, 80%+ of the money is theirs.

It was the banker that determined creditworthiness in the past. Unfortunately, the root-ball of the entire housing (credit) bubble was the greed of the bankers. Everyone else was merely acting out the script that was written by Wall Street bankers. The greed of the bankers necessitated the lifting of time-tested debt-to-income ratios, down payments, income verification, credit history, job continuity, and risk assessment. Because ALL of these were lifted, any person was able to get just about any amount of money to participate in the “American Dream” of home “ownership.”

In reality, the mortgage industry became a gigantic confidence game. As long as everyone played along, nobody would get hurt, or at least that is how it was supposed to work.

Today, just about every bank in the United States is insolvent. The Federal Reserve has been keeping our rancid banking system alive with direct injections of cash, and the injections are without historical precedent. This insolvency is descends directly from the abandoning of those time-tested banking regulations and practices.

How did that happen? Well, the banks found that money-market managers and retirement fund managers were eager for mortgage-backed securities and would buy them with no-questions asked. The risk to the banks declined rapidly (as it shifted to fund managers), and the only risk that remained was not getting the loan to sell into the debt markets. As the borrowers became saturated with homes, the banks needed to expand into tranches of people that were bad credit risks.

Couple all of this with the multi-generational lesson of having real estate equated with achieving the “American Dream” and a nation eager to replace stock speculation with real estate speculation, and you had no end of people who wanted to borrow money to buy real estate they could not afford or did not need.

You would think that the banks would have learned their lessons, but you would be wrong.

Banks are in a “lend-or-die” environment. They need the fees to keep the lights on and their employees’ paychecks clearing. Collecting the debt is tomorrow’s problem. Another CEO will have to answer to regulators and shareholders. Specifics of banking accounting is probably best explored in another blog, but let it suffice to say that the desperation of the banks exceeds their stupidity, and the entire industry is in on the practice.

A responsible banker would never lend to someone who is in a negative equity situation on their existing home, while they are offering to put little or nothing down on their new loan. Think about it. It is difficult to imagine that someone’s debt-to-income ratio will qualify with two mortgages. With little money down, the borrower will have, not one, BUT TWO mortgages that have almost no borrower skin in the game.

Are they insane? Would you loan money to someone in that situation? Would you write that mortgage, given that “buy and bail” is a practice that is very well known by every single lending institution in the United States?

So, where are the bankers? It’s their money, so why are they not asking the hard questions? Why does the NAR have to police this matter? Banks need to have the courage to say “no.” Unfortunately, they don’t have the financial means to do so.

Their greed clouded their judgment. They thought they were dumping shaky mortgages into a market that would never notice. They thought that real estate prices would outstrip incomes in perpetuity. They never, ever considered their exit strategy or the consequences of their actions.

Just because you are a banker does not mean you are smart.

The banks now find themselves in a position where people are essentially exercising the “foreclosure option” of their mortgage (where there is no fraud), and people are gaming the system to engage in “buy and bail,” which is fraudulent, or should be. Had banks required 20% down, people would not be willing to just walk away.

I don’t blame people in no-recourse loans that give their homes back to the bank, provided they don’t take out another mortgage without disclosing their intentions. If I were the senior underwriter for a bank, I would not issue mortgages to people with little or no equity in their existing homes.

I don’t fault the real estate agents that match buyers and sellers, provided they didn’t initiate the fraud. At the end of the day, you have to be able to look at the man in the mirror and not want to run and hide. The people that run this blog should have no problems with the person looking back from the mirror. The mere fact they are asking these questions make them people you WOULD WANT to have in a business relationship.

I fault the people who are committing fraud and banks for not doing their due diligence and allowing that fraud to continue. In other words, those motivated by vacant greed are to blame.

Greed is destructive. Greed clouds rational thinking. Greed fails.