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"Buy and Bail":

A new twist in the foreclosure drama--a consumer gets a mortgage to buy a second home by promising to rent out his first home and using the rental payments to pay the second mortgage. Then, once he buys the second home, he does a walk-away foreclosure on the first home rather than renting it out. The new loan thus is obtained before the foreclosure damages his credit score. From the WSJ story:

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.

***

That loophole currently works like this: Homeowners provide a rental agreement showing that they will rent out their first home, and underwriters allow rental income to cover as much as 75% of the mortgage payments on the first home when determining whether the borrower can make payments on two homes. This allows homeowners to secure a second mortgage that they might not otherwise afford.

The strategy is especially attractive in states with antideficiency laws for purchase-money mortgages, such as California and Arizona. One Nevada real estate broker who specializes in "buy and bail" plans says he is receiving one to two dozen inquiries per week about buy and bail plans.

Fannie Mae is proposing new guidelines to try to restrict the practice.

krs:
"Fannie Mae is proposing new guidelines to try to restrict the practice"

Perhaps I'm demonstrating my ignorance, but is this not the sort of thing that the market could catch on to on its own? If anyone has an incentive to be aware of these practices, it's the lender for the second mortgage... and if the buyer breaks her promise to rent out her first home, there must be some kind of recourse for the second lender.

...though I suppose the person who really gets screwed is the lender of the first mortgage.
6.11.2008 7:36am
Curt Fischer:

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.


How quickly (if at all) could announcements in a major national newspaper that you intend to default on your mortgage result in adjustments to your credit score?
6.11.2008 8:03am
SHG (www):
Would it bother anyone that this conduct violates 18 USC 1001, 1014 and 1344?
6.11.2008 8:03am
Jim at FSU (mail):
No, it isn't fraud.

You fully intended to pay off the first loan when you applied for it.

You fully intend to pay off the second loan when you apply for it.

The dishonest part is deciding to no longer honor your original commitment, but this is breach of contract, not fraud. Some argue that from a society-wide perspective, efficient breach is better than forcing parties to continue to perform a painful contract.
6.11.2008 8:33am
E.W.:
So it's not fraud to (falsely and intentionally) assert that your income includes rental income or that you should qualify for the loan despite the first mortgage on the basis that you are going to pay for the first loan with rental income. And it's not fraud to submit intentionally false paperwork to the proposed lender (the rental agreement) in order to secure the loan?

I'm just wondering, I don't do mortgage law.
6.11.2008 8:45am
MAH:
It is fraud but against the second mortgage who doesn't really care since you are in fact paying it. The first mortgage holder doesn't have recourse since the fraud wasn't committed on that contract. Unless of course you screw up by having the same party hold both mortgages. I think that's what the loophole is at least.
6.11.2008 8:53am
krs:
Same question as E.W., Jim at FSU. I recall efficient breach from contract law, and I understand your argument about fraud, but what about the fact that Ms. Augustine will secure her second mortgate by making a promise that she doesn't intend to keep--i.e. renting out her first home?
6.11.2008 8:53am
riptide:
E.W.: The reason (IMO) that it's not fraud is that the rental income would be used to offset the cost of the first mortgage. No rental income, but no property = same outcome from the perspective of the 2nd mortgage company.

Look at it this way: if you inherited a large sum of money, paid off the mortgage on house number 1, and kicked out the renters, would that be fraud? I would say no.
6.11.2008 8:55am
E.W.:
MAH, I think is right, there is an incentive problem as to actual prosecution, first lender isn't defrauded, and second lender doesn't care so long as they're being paid.

She would be especially bold, however, to try this with both loans being secured by the same lender.
6.11.2008 8:55am
E.W.:
Riptide, the assertion of rental income when she clearly never intends to rent the place is where I think fraud enters the scenario. Non-fraud in this situation would be something like "Dear Second Lender, please give me the money. You shouldn't worry about my inability to pay due to the first mortgage because I'm gonna leave those suckers holding the bag by letting them foreclose after you give me the loan, but I really really extra-promise to never do anything like that to you, so you shouldn't worry about it. Thanks, non-fraudulent applicant."
6.11.2008 9:00am
Cactus Jack:
EW: The second lender may care in the sense that, had it known that the borrower intended to default on an earlier credit obligation, it may have priced and/or structured the loan much differently (such as requiring more equity up front) to reflect the risk presented by the borrower.
6.11.2008 9:02am
E.W.:
Cactus Jack, you're right, but I wonder whether the second lender would ever do anything about a deal like that. I guess we'll see.
6.11.2008 9:05am
Houston Lawyer:
I would think that the second lender would only benefit from the lease of the first house to the extent that the lease payments exceeded the mortgage payments and taxes on the first house. If she is $200,000 grand under water, I don't see how this is the case.
6.11.2008 10:02am
Jim at FSU (mail):
Remember that the underlying assertion being made to the 2nd mortgage lender is that the borrower has the means and the intent to timely make payments on the second mortgage.

Rental income partially offsets the enormous first mortgage payments. The homeowners is basically just saying "yeah, it's a drain, but adding your mortgage won't bankrupt me because I can cover it with the rental money and be no worse off."

If the borrower later divests themselves of the rental property, they lose the rental income but also the mortgage payments. This will not negate the original assertion since the net effect on the borrower's income will be an extremely positive one. This is beneficial to the 2nd lender. Intending to do this isn't fraud at all. Quite the opposite.

Unless the mortgage contract specifically promises that the lender shall receive the rental income from the first property and that no other money shall suffice, it isn't material that the borrower rearranges his affairs and pays from a different source. Even if the contract did say that, a court isn't going to grant specific performance, damages would be in money and since the borrower is already paying them the money (from a different source), it isn't even a material breach that is being alleged. Despite my disorganized thoughts, I'm basically trying to say that the second mortgage company has no case.

The first one may have a case by virtue of the enormous unsecured debt that they get left with after the foreclosure, but the various asset protection laws and mortgage laws at the state level probably protect the homeowner. There is definitely no fraud here either since the homeowner doubtless intended to pay the mortgage at the time he got the original loan. He just got screwed by his failure to anticipate market conditions.
6.11.2008 10:09am
Al Maviva (mail):
I suppose the person who really gets screwed is the lender of the first mortgage.

What the hell are you talking about? Those of us in modest homes on 30 year fixed mortgages, who make our payments and are in no real danger of foreclosure, are the ones who are about to get screwed by falling home prices and a taxpayer-funded bailout. I hope that nice lady managed to draw out any equity she had in her home, because I hate to think about her losing her nice cars, big screen or any of the other essentials of modern life.

Jerks.
6.11.2008 10:27am
Allan (mail):
All things considered, the problem in this situation is the mortgage on the first house. Either the lender or the borrower is going to get the shaft from the lower prices. The borrower could get the double shaft: lose any down payment for the house and ruined credit rating. The lender is going to lose no matter what happens (there will be foreclosure in any case).

But, the lender was protected at the front end. When the lender priced the loan in the beginning, the lender knew that California was a non-recourse state. Thus, the lender should have priced loans higher in California than a non-non-recourse state. That is, the risk of loss in foreclosure was higher in California, therefore, the interest rate should have been higher in California.

So, the mortgage lender was able to protect itself by insuring against non-payment. The borrowerer is able to get out of a bad contract and pay the price required by contract and law. The losses are distributed appropriately.

As for the second mortgage. That is a win/win situation, too. We have a borrower who really is a good credit risk and a lender who will get its money.

Who loses? Possibly current homeowners, because walkaways are encouraged. But they would have lost anyway, because the walkaways would have been foreclosed upon.
6.11.2008 10:37am
genob:
This was practice was pretty common in southern California in 1991-92.
6.11.2008 10:52am
krs:
What the hell are you talking about?

It's not that complicated. First lender makes a loan to a borrower. Borrower decides to stop making payments. Instead of loan payments, lender gets a house that isn't worth much.
6.11.2008 10:58am
Roscoe (mail):
The lady in the WSJ article is committing a crime. Under 18 U.S.C. 1014 it is a felony to make a false statement for the purpose of influencing the actions of a federally insured bank with respect to a loan application. It doesn't matter if you intend to pay the loan, and in fact it doesn't matter if the bank is repaid every dime it is owed.

Moreover, the brokers who are are encouraging these schemes are guilty of conspiracy.
6.11.2008 11:01am
some dude:
The first bank doesn't lose. It gets a house. That's what it agreed to. The house settles any debt. That's what a mortgage is. If the person makes all payments they get the house. Else, the bank gets the house.

Is the first house "upside-down"? Yes. The first bank made a bad investment, but they are the bank. They are supposed to know the market well enough to make wise investment decisions. They goofed.

The person in the story is just making the only logical decision. It makes no sense to rent out the first property.
6.11.2008 11:03am
MarkP (mail):
The main problem is each State's anti-deficiency statute. These statutes represent public policy choices that encourage this type of behavior. What bothers me is that the lenders who, knowing that they have no recourse, lent this money and foisted these lousy loans to others or, worse, now want a taxpayer funded bailout for their bad decisions. Those of us outside CA, AZ, etc. who know that no-recourse statutes are bad public policy are nonetheless being forced to pay the consequences for those State's poor policies.

The only answer is to fight a taxpayer-funded bailout. Unfortunately, the two parties are so beholden to the lenders or fearful of mass foreclosures that we will have an uphill fight. But it's a fight that we can, and should, win.
6.11.2008 11:06am
Jim at FSU (mail):
The main problem here is that mortgages are being sold with apparently zero due diligence on the part of the buying entity. It seems entirely too easy for a mortgage broker to arrange a high risk mortgage to a ninja (no income, no job, no assets) and then sell it off to some other entity as if it were a chest full of gold bullion.

You would think the borrower's ability to repay the loan would be of central importance to determining the fair value of such an instrument, no?
6.11.2008 11:19am
one of many:
I'm not so certain a fraud isn't being committed on the 2nd lender. The second lender is conditioning the terms of the loan on the basis of the borrowers assurance that they will pay off the first loan using rental income, which despite claiming is their intent is actually not. If the second bank knew the borrower's true intentions they would at least change the terms of the loan (probably charge more), so they have been defrauded into granting a loan which they wouldn't if they were aware of the true intents of the borrower.
6.11.2008 11:47am
Aultimer:
And yet lenders are still offering the same interest rates to California (non-recourse) borrowers as they are to borrowers in, for example, Maryland (verified by bankrate.com just now).

Apparently the market doesn't care much.
6.11.2008 11:51am
cathyf:
I agree with some dude. And furthermore, the first bank is making another poor investment decision right now.
"I can find the same exact house as what I live in right now for half the price,"

Imagine the following transaction:

-- Ms. Augustine sells the house to lender #1 for the exact mortgage balance.

-- The proceeds from that sale pay off the current mortgage.

-- Five minutes later, bank #1 gives Ms. Augustine a mortgage for the exact same terms that bank #2 was going to give Ms. Augustine on her purchase of "the exact same house 2 blocks away."

-- Five minutes after that, bank #1 sells the house to Ms. Augustine for its market value, which she finances with the mortgage that bank #1 just gave her.

Compare that scenario with what Ms. Augustine is planning: (I'm going to use some real numbers to make things more concrete -- the article implies that the mortgage on the current house is $400,000 while the market value is $200,000.)

-- In my scenario, the bank starts with a $400,000 mortgage on a house worth $200,000, eats the $200,000 loss, and ends up holding a reasonable, not-upside-down mortgage on a $200,000 house. Ms. Augustine ends up slightly better off -- she has basically the same financial arrangement that she would have had by buying "the same house 2 blocks away at half the price," but she doesn't have to move.

-- In the planned foreclosure, Augustine walks away from the house. The house deteriorates, slowly if just from neglect, or very quickly if it is subject to vandalism. In the very best case, the bank acts very quickly (1 year) and sells the house for a substantial, but not ridiculous, discount to the $200,000. The auction house gets a substantial chunk of it. Best case, the bank's loss is $200,000+discount+sellingCosts. In the worst case, the bank loses virtually all of the $400,000 because vandals move in and signficantly damage the place, and because the selling costs eat up any residual value that the property has.

It seems to me that the bank owes a fiduciary responsibility to its stockholders and/or to the holders of the MBO (if this mortgage has been packaged into an MBO) to play "let's make a deal" with Ms. Augustine. We've tossed around "fraud" accusations against Ms. Augustine -- anybody want to try "breach of fiduciary obligations" against Ms. Augustine's bank?
6.11.2008 11:52am
bertram (mail):
"Fannie Mae is proposing new guidelines to try to restrict the practice"

Perhaps I'm demonstrating my ignorance, but is this not the sort of thing that the market could catch on to on its own?

----------------------------------------------
It took the market years to catch on problems of giving loans with no down payment required. And Fannie Mae is only saying it won't deal with these loans. If a lender wants to make such a loan with its own money then its not Fannie Mae's area, although I'd like to think that the FDIC might have something to say about the matter.

It's fraud if you show a rental agreement and claim you are going to rent the first house when in fact you are planning to let the first house be foreclosed.
6.11.2008 11:56am
Deoxy (mail):

As for the second mortgage. That is a win/win situation, too. We have a borrower who really is a good credit risk and a lender who will get its money.


Really?!? A "good credit risk"??? Um, sure... they are having a home foreclosed on, and that makes them a "good credit risk".

If the market falls again, they will simply do this again (if they can). That is decidedly NOT a "good credit risk".

Basically, this is a way to shift all market risk to lenders. This MUST lead to higher rates from lenders... or a tax-payer funded bailout. Neither of those is harmless to those of us who don't do this dishonest (at least) action.
6.11.2008 12:07pm
Smokey:
It's fraud if you show a rental agreement and claim you are going to rent the first house when in fact you are planning to let the first house be foreclosed.
Yes, it is. But it's more difficult to prove than to prove that the rental agreement was likely a sham. Check the utility bills, ask the putative renter if they ever knew the lessor, or if they just answered an ad, ask the lessor how they found the renter. Did they place an ad? Did a renter actually move into the property? Did a deposit check clear?

Odds are good that this "rental agreement" was just done with a wink and a nod, because the underwriter needed to see one.
6.11.2008 12:13pm
cathyf:
Also, some of this is just in the presentation. If Ms. Augustine makes a good-faith effort to rent out the home (maybe even rents is out for some period of time), and/or makes a good-faith effort to sell the home, then the fraud accusations won't stick.

Imagine that Ms. Augustine goes through with her plan to buy the second house, and figures "what the heck" and instead of just mailing the keys in to the first lender right away, pounds a "for sale by owner" sign into the front yard. Imagine that a buyer comes by and offers the market value for the house. (Perhaps they are playing the same game planning to walk away from their mortgage on their house 2 blocks away.) Ms. Augustine contacts bank #1 and says "here's an offer for market value, you won't have to pay the huge expenses of foreclosing and selling, take it or leave it." And bank #1, fulfilling it's fiduciary responsibilities, takes the money and declares the mortgage "paid in full."

Just the fact that this scenario is reasonably possible would seem to me to be a completely adequate defense against the charge of fraud.
6.11.2008 12:13pm
Ben P (mail):

It's fraud if you show a rental agreement and claim you are going to rent the first house when in fact you are planning to let the first house be foreclosed.


True, but this is missing the point.

It's a potential fraud against the mortgagor on the second house, not the first.

Assuming the individual in this case bought within her means on the second house, she's not going to default on her mortgage payments.

If she were to default, she might well face a potential fraud suit from the mortgage company.

But no mortgage company is going to look at a paying loan and say "no, I think we'll toss this loan and sue you for fraud because you misled us on the application." That's a losing proposition for them.

There's no fraud as against the first mortgage company, all they did was issue a regular mortgage on a house to someone who couldn't afford it in a non-recourse state.

It seems likely there is a violation of 18 USC 1014, but I don't think that law is typically enforced without a complaint from a mortgage company. A mortgage company isn't likely to complain against a buyer who's actually paying their debt.
6.11.2008 12:19pm
Mr. X (www):
The lady in the WSJ article is committing a crime. Under 18 U.S.C. 1014 it is a felony to make a false statement for the purpose of influencing the actions of a federally insured bank with respect to a loan application.


What false statement? Is there an indication that the rental agreement presented to the second mortgage company was invalid?
6.11.2008 12:26pm
Oren:
Smokey, you are absolutely right that this is the optimal result. Unfortunately, because the interested party (the holder of mortgage #1) isn't able to be flexible, it gets the worse end of the deal.
6.11.2008 12:31pm
Henry Bramlet (mail):
One interesting thing that isn't being reported is that Mrs Augistine is going to be raped by the IRS when she does this. At least, that's my read according to the article below:

California AD Laws

Notice the last few paragraphs. Basically, because the Bank gets soaked for $200,000, they can write it off and then send Mrs Augustine a 1099 which basically makes this "forgiveness of Debt" taxable income. (She owed 200,000 and the bank "gifted" her $200,000 in forgiveness.)

According to the article, the homeowner can avoid the Taxes if she is "insolvent at the time of the forgiven debt". But that may interfere with her ability to get the second loan and- besides, she may not be legally insolvent at that point!
6.11.2008 12:55pm
Deoxy (mail):
cathyf,

So, the fidiciary duty of the bank is give money to the dishonest? Um, I fail to see how that will work out in the long term...

Sure, if you only look at the current case, that makes sense... but we should look a lot farther than that.
6.11.2008 1:03pm
dejapooh (mail):
I think we all clearly agree that there is fraud against the second lender. The real trouble begins if she, for some reason, has the second home foreclosed upon. If that happens, would there be criminal charges possible or would it be civil?
6.11.2008 1:16pm
bertram (mail):
Banks are somewhat inflexible on losing $200,000 on a short sale because it's hard for them to tell if it really is the market price or collusion with friend/relative.
6.11.2008 1:21pm
hattio1:
Here's a question for economist types out there. What is this going to do to home prices? My gut says it will make home prices drop less in the higher end, but make them fall even further at the low end. But will this eventually trickle down so that people in every pricing category are doing the "buy and bail?"
6.11.2008 2:08pm
Snarky:
I think trying to "restrict" this practice would do more harm than good.

It would have been easy enough for the homeowner to rent out the first home for a few months, and then let it foreclose. It would then be impossible to say that they never intended to rent it out.

The only problem with this is that the renter gets screwed when they are evicted from a home they have only lived in a few months.

If you ask me, I think reasonable leases (1 year or less) that are made at arms length should be encumbrances on the property that bind subsequent owners to avoid this problem.
6.11.2008 2:13pm
Snarky:

I think we all clearly agree that there is fraud against the second lender. The real trouble begins if she, for some reason, has the second home foreclosed upon. If that happens, would there be criminal charges possible or would it be civil?


I think a case like this is often hard to prove. You have to prove that the person who turned in the rental agreement new that it was important (their broker did not tell them it was just a non-binding formality -- i.e. it is just more paperwork in that mountain of paper whose purpose the homeowner doesn't understand) and you have to prove, beyond a reasonable doubt, that they knew at the time they presented the rental agreement that they were not going to rent it out.

Depending on the evidence, it is not necessarily an impossible case to prove, but in many cases it will be pretty tough.
6.11.2008 2:21pm
cathyf:
I live somewhere (small-town midwest far from any major cities, 100-yr-old housing stock) where appraisal is more art than science, so I am familiar with the problem of figuring out what the market price really is. But the description of Ms. Augustine's house is that it is the typical for the most "bubbly" real estate -- new construction in vast tracts of identical houses. (Hence the comment that she can go two blocks away and get the exact same house.) Any lender looking at the size of the shortage on the short sale and whinging about how that can't be the real market price is paying tens (if not hundreds) of thousands of dollars for the privilege of a really good whine. 2-3 years down the road, when the lender sells the trashed remains of the house for $10,000 to the next-door neighbor who tears it down to get a bigger yard, is that "fine whine" going to be worth the cost?

There is a really useful concept in economics called "sunk costs". Those people who appreciate it will find life far easier to navigate.
6.11.2008 2:25pm
Harry Eagar (mail):
Yeah, where are the lenders that care about being paid back?

The company that found my last mortgage (17 years ago) is advertising no-doc jumbo mortgages today.

17 years ago, it wasn't doing that.
6.11.2008 2:30pm
cathyf:
The only problem with this is that the renter gets screwed when they are evicted from a home they have only lived in a few months.
Why would the foreclosing lender evict the renters? Good renters are not just immediate monthly cashflow for an otherwise non-performing asset, but good renters are the best protection against destruction of the value of the home through neglect and vandalism. Evicting the renters would be flushing money down the toilet...
6.11.2008 2:31pm
one of many:
depends on jurisdiction and forecloser's intent with the property. if the forecloser intends to make a quick resale to a property speculator, for instance, many jurisdictions require the renters to be evicted before the sale can take place. having a renter in place in a jurisdiction which makes eviction a long process seriously limits the ability of the forecloser to sell the property, would you be more interested in buying a house which you can move into in 3 months (or more if there is an appeal of the eviction), or one which you can move into tommorow?
6.11.2008 2:49pm
Bill R:
Some comments suggest that Ms. Augustine's plan isn't a fraud against the second lender because she will, after all, make the payments on the second house. It seems that Ms. Augustine's plan to allow foreclosure on the first property and her masking of that plan by presenting a (presumably) false rental agreement and making a false statement regarding her intent to rent the first property is a fraud against the second lender.

Once Ms. Augustine has the first foreclosure on her record (spoiling her credit for seven(?) years), she's much more likely to default on the second loan if, for example, two years later the second house is underwater due to a continued decline in the market — the incremental cost of the the second foreclosure is much smaller to her (just another couple years of spoiled credit) because of the overhang of the first foreclosure. Especially in a non-recourse state, the fear of spoiling one's credit for seven(?) years is a significant motivation to continue making payments even if the borrower is a little underwater and presumably lenders rely on this motivation when making a loan but the borrower's fraud in this case has masked her plan to eliminate most of this motivation to make payments to the second lender.
6.11.2008 2:54pm
Allan (mail):
I just don't understand why lenders do not simply address the non-recourse issue by charging higher interest for higher risk loans in states that have non-recourse laws.

As for the ethics. If this borrower had not owned a home, there would be no issue. the borrower merely intends to break a contract with bad terms. Does this mean she is a higher credit risk than someone in exactly the same situation, except who does not own a home? Maybe, maybe not. I have not done the research.

Personally, I blame the whole housing bubble problem on the realators, the mortgage brokers, the lenders, the insurers, and the bankers who bought the loan packages.

If I left 50 $100 bills on 42nd and Broadway and came back the next day to find them missing, would you be sympathetic because we can expect everyone to do the right thing, or would you think my actions foolish? The lenders just left the money on the street. I have little sympathy.

But, I don't have much sympathy for the guy who took the money off the street, either.
6.11.2008 3:16pm
Dan Weber (www):
I thought that California's non-recourse escape was only good on your first mortgage for a primary residence.

If she has declared to a third party that she is "renting" the house out, doesn't that negate the "primary residence" clause?

Note: I could be talking out of my ass.
6.11.2008 5:07pm
Alex.:
The fraud comes in by presenting "false information" ie. the rental agreement when you take out the second transaction, especially since it has to be executed with another persons signature. So either you falsified the rental agreement and fraudulently provided it as income, or you had someone else sign as an accomplice.

I inherently feel though that this is the "consumers" PMI (Private Mortgage Insurance), and cant feel too sorry for the corporations and lenders who screw the middle and lower class each day.
6.11.2008 5:09pm
Alex.:
Also, while a bank may not foreclose for the fraud if payments are on time as it will be a bad business decision, they CAN reserve the right to pursue you for fraud down the road if you do ever default...I believe it would have to be within the statute of limitations regarding that.
6.11.2008 5:14pm
guest (mail):
Alex: what about really renting out the house and still intending to walk away? Is that fraud against the bank, against the renter, or both?
6.11.2008 6:03pm
EPluribusMoney (mail):
One interesting thing that isn't being reported is that Mrs Augistine is going to be raped by the IRS when she does this.

A recent federal law eliminated that tax.
6.11.2008 10:54pm
Dan Simon (mail) (www):
I doubt that the second lending institution is being defrauded--after all, it knows all about the underwater mortgage, and can reasonably infer the risk that the borrower will change his or her stated plans and accept foreclosure rather than bother with the hassle of renting.

A more likely candidate for fraud victim is the purchaser--and there almost certainly will be one--of the second lender's mortgage. It likely won't be given more information than that the mortgage is part of a large package of mortgages, all taken out by borrowers with good credit ratings. That is, the second lender will be concealing the highly pertinent fact that the borrower is a high risk of quickly turning into a bad credit risk.

And if you want to understand the subprime mortgage crisis, you could do worse than to think about this case--and the difficulty a whole bunch of commenters had figuring out the identity of the real victim.
6.12.2008 1:27am
Suzy (mail):
This is what happens when people don't want to live within their means, but it applies equally to the banks who give out these loans like candy as it does to the individual borrowers. Those of us who stick to what we can afford to pay end up footing the bill, one way or another, for all of this foolishness. "They" say that the consequences are just too big for the economy, to allow people and banks to suffer for these mistakes. I remain skeptical about that.
6.12.2008 3:46pm
Big Will:
What exactly are the tax consequences for a person in California that walks away from the mortgage?Can they really walk away,send in the keys(regardless of the mortgage company accepting the keys could be viewed as agreeing to a deed in lieu of foreclosure-and not even lock the door?The house is vandalized beyond belief,and the mortgage company has no recourse in California?What have things come to for crying out loud!
6.17.2008 6:28pm