Buy and Bail questions

[CuriousGeorge]

My wife and I bought at house at tail end of the boom for $130K. It is one bedroom, one bathroom, kitchen, living room 550sq Ft.
(Glendale, AZ, 85301 zip)

Today the house comps at about $20K and we still owe over $120k.

We will NEVER be able to sell or re-fi this house that we were originally only planning to keep for 2 years before selling.

Our mortgage rate is now adjustable at 10% min and 18% max.

So here are my questions:
1 - If my wife and I go out and buy a house with cash, then let the current over-valued home get forclosed on or deed in lieu of forclosure, is there any law broken? No forging loan docs, etc.. etc... just buy a house cash and let the old one go.

2 - any idea if we'll owe taxes on the $130K value after foreclosure?

3 - is there anything else we should know?

We have $20K cash and think we can beg/borrow an additional 20k from various non-mortgage sources.

Either way the house WILL have to be let go of in the future. We can't or won't pay $2,500 monthly mortgage for a 500sq ft house when the economy improves and interest rates climb again.

[jakelabry]

If you pay cash for a new house I don't think there is any fraud involved. The thing I would worry about is any deficiency judgments on the old house attaching to the new one in case they do an asset search.

[cleach]

Yep, you should be okay.

How did you end up with a $2500/mo payment on a $130K loan? That's more than our payment on $272K @ 8%!! I'd be walking, too!

[jakelabry]

Originally Posted by cleach

Yep, you should be okay.

How did you end up with a $2500/mo payment on a $130K loan? That's more than our payment on $272K @ 8%!! I'd be walking, too!

Did you see the interest rates - 10% min. and 18% max!

[cleach]

Oops! missed that! Sorry!

[CuriousGeorge]

We have 20k saved. we can get some OK houses for 25-30k. and some awesome houses for 40k.

if we mortgaged the new property before the foreclosure (10% to 30% down) and let the first house get foreclosed - any foreseeable problems?

as far as the deficiency judgments we appear to be OK because we're in AZ:
Arizona foreclosure and anti-deficiency laws

[jakelabry]

Originally Posted by CuriousGeorge

We have 20k saved. we can get some OK houses for 25-30k. and some awesome houses for 40k.

if we mortgaged the new property before the foreclosure (10% to 30% down) and let the first house get foreclosed - any foreseeable problems?

as far as the deficiency judgments we appear to be OK because we're in AZ:
Arizona foreclosure and anti-deficiency laws

If you buy a new house with a mortgage, then intentionally default on the one you already own, you run the risk of having legal problems. This is buy and bail. You said initially you were going to pay cash up front for a new house. A mortgage application is going to ask questions concerning your financial situation and they won't lend to you if they think you intend to default on your current home therefore you would be deceiving them - in writing and that's where the FBI potentially gets involved.

[CuriousGeorge]

Gotcha.
so it MUST come from an individual or some other such non-mortgage company entity.

[dogatemy]

Originally Posted by jakelabry

If you buy a new house with a mortgage, then intentionally default on the one you already own, you run the risk of having legal problems. This is buy and bail. You said initially you were going to pay cash up front for a new house. A mortgage application is going to ask questions concerning your financial situation and they won't lend to you if they think you intend to default on your current home therefore you would be deceiving them - in writing and that's where the FBI potentially gets involved.

Don't pay any attention to this guy. There is no law broken here and if you don't believe me then find a reputable real estate attorney and present him with the loan documents. If you need a name and number for a reputable attorney then email me.

First

If you buy your next house in cash then there is no mortgage application. How could you possibly lie on an application that does not exist?

Second

If there was a mortgage application then the application would ask the following important questions..

- Do you intend to use the home as your primary residence? a vacation home? an investment property? This question will dictate what your interest rate is. The smart thing to do would be to answer "investment property" because doing so ensures you pay a higher interest rate. It is kinda hard to argue you defrauded the mortgage company by demanding to pay them more money than you would have otherwise.

- If you currently own then do you intend to sell your current property before buying the new property? This question will dictate weather they include your current mortgage payment in your expense figures which will dictate if you can afford to pay both both mortgages at the same time. My lender said they would fund my mortgage as long as the old house and new house had a combined mortgage payment of less than half my salary. Banks are so greedy.

These are the only 2 relevant questions that could cause you trouble.

If you are curious about what an attorney would say in response to your question then I will give you a paraphrase from my attorney:

The Road to hell is paved with good intentions.
It is near impossible to prove 'intent' without a signed confession."

Third

How would the FBI get involved? Here are the only 2 ways my attorney could conceive the FBI getting involved..

- The FBI would get involved if you wrote a letter to your previous lender saying, "Look.. I want a loan modification. If you don't give it to me then i'll buy another house and default on this one. Signed.. Evil person. muhahahahaha". 90 days after writing this letter you defaulted on your mortgage after you applied for, and obtained, a mortgage from another bank. This would probably be the only possible evidence they could present that would push you over the "reasonable doubt" burden of proof.

- The FBI would get involved if you flat out lied to your previous lender and they examined your application after you defaulted. For example.. you used Photoshop to add an extra zero to your paystub (which is actually easier to figure out then you might believe), you were really unemployed when you submitted your brother's Photoshopped paystub, you really owed $300,000 in child support and you forgot a zero or two, you paid a cash down payment only to find out later it was really income from selling the mortgage officer meth on your days off (and you were later convicted for it), etc.. etc..

In other words.. as long as you did not obtain a mortgage via fraudulent means then there is nothing anyone can do when you walk away.


Last

The whole threat of an FBI agent is almost moot in most of these cases. You're not an investor, a bank employee or a CEO. You're a home owner. If I was the prosecuting attorney then I would do everything I could to make this case go away because no matter where I put you on trial there will be someone in that jury pool angry at the banks, the government or the system. All the defense attorney has to do in his opening statement is something like, "The prosecution is going to try to paint my client as an evil criminal just because she couldn't afford to pay her mortgage bill while the banks rake in billions of taxpayer money. It is easy to threaten all of you because you have no place to go. Well.. My client had some place to go and this made INSERT BANK HERE angry! They couldn't bully my client anymore. Would you want to be thrown in jail just because you couldn't pay your mortgage? You should examine the facts and decide if my client deserves to go to jail just because she fought back." The only thing the defense would have to do after his/her opening statements is provide the jury an excuse to acquit.

The fact of the matter is that most people are angry. Either they are a victim, someone in their family has been a victim or they read the paper and they're angry about everyone else who has become a victim. Someone in the jury pool is going to vote their emotions and it almost guarantees the homeowner is going to walk. If you don't believe me then ask 12 people at work if they would be willing to send someone to jail for Buy and Bail? I did and 50% of my coworkers said they would not convict and 2 out of 10 were so angry with the banks and the system they would be willing to deadlock a jury for "more than a week" to actively prevent a conviction. If 20% of my coworkers were willing to deadlock a jury pool and 50% felt it would be immoral to convict someone for Buy and Bail then what prosecutor in their right mind would believe they could manage a unanimous jury of your peers?

[jakelabry]

Yeah, don't listen to me! I just said - pay in cash, no problem. Get a mortgage, potential for problem exists. Wow, was that stupid advice!

[dogatemy]

Originally Posted by CuriousGeorge

So here are my questions:
1 - If my wife and I go out and buy a house with cash, then let the current over-valued home get forclosed on or deed in lieu of forclosure, is there any law broken? No forging loan docs, etc.. etc... just buy a house cash and let the old one go.

2 - any idea if we'll owe taxes on the $130K value after foreclosure?

3 - is there anything else we should know?

1 - See my previous post but the short answer is "No". Even if you obtained a mortgage on the new house then the answer would still be "No" as long as both applications for your previous and new mortgage were both accurate, your documentation submitted was accurate and your intentions at the time you signed the documents were accurately reflected on the mortgage documents.

2 - You will not owe taxes on the forgiven balance after foreclosure assuming the loan is non-recourse. Of course the usual caveat applies: You should have a reputable real estate attorney and a good CPA who has experience with tax law review the documents.

3 - You should read through the forums to make sure you understand what is required when walking away. If you have non-exempt assets and you are not prepared to file for bankruptcy then make sure you maintain insurance on the house and keep paying your HOA bills until after the Trustee Sale. Also keep in mind you are responsible for the house until after the Trustee Sale so make sure you maintain the property. The city can still fine you for trash and weeds on the property up until after the Trustee Sale. If the husband is on the mortgage and title for the old house then you may want to buy the new house in the wife's name. This way if they try to sue for a deficiency (just in case there is a change in the law between now and your Trustee Sale) then it would be near impossible for the bank to force the sale of the new house. Keep in mind your new house, as long as it becomes your primary residence, is protected by law from a judgement up to $150k in equity.

I can't really think of anything else you should know. If you have any other questions then let us know. We'll be glad to help!

[dogatemy]

Originally Posted by jakelabry

Yeah, don't listen to me! I just said - pay in cash, no problem. Get a mortgage, potential for problem exists. Wow, was that stupid advice!

Sorry if I mis-read but your phrase, "You said initially you were going to pay cash up front for a new house.", is not, by English standards, a complete thought. This confused me.

I still do not agree with your advice that, "If you buy a new house with a mortgage, then intentionally default on the one you already own, you run the risk of having legal problems." You run the risk of legal problems anytime you default on a contract. You are predicating your legal problems on the decision to Buy and Bail. My response clearly states that your assertion is incorrect. There is no law against "Buy and Bail".

I also think this is an overly broad statement, "A mortgage application is going to ask questions concerning your financial situation and they won't lend to you if they think you intend to default on your current home therefore you would be deceiving them - in writing and that's where the FBI potentially gets involved." You are correct that the banks are inclined not to lend if you intend to default on your current home because you would then, technically, be considered a credit risk. Of course there is nothing on your application that asks if you "intend to default on your current home" or if you "intend to be a credit risk". You again are painting a very broad stroke that the FBI has some magic way of knowing what your intentions were at the time of the application and somehow they could use these intentions to demonstrate your committing fraud by virtue of filling out the application.

There is no law that says you have to tell the bank if you intend to default on an unrelated obligation and if there was such a law then how could you possibly enforce it unless you know what someone was thinking at the time they completed the application? Even if I said to my coworker that "I intend to default on my current mortgage" then I could argue that my coworker lied, mis-heard or I had a religious experience on my way to signing the application and God said not to default and therefore I shall not default. Of course I was on my way home after signing the mortgage application, I hit a bird, realized that God clearly does not exist or he would have saved that bird so I changed my mind.

[jakelabry]

Any bank providing a mortgage will ask what he "intends" to do with the old home. If, as you say, he tells them it will be an investment property which he intends to rent, then they will ask him to produce a rental agreement. The FBI defines mortgage fraud as "any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan."

Curious George, do yourself a favor, do not proceed without seeking professional legal advice.

dogatemy - please cite your reference for claiming "You said initially you were going to pay cash up front for a new house" is a phrase and not a complete thought by "English" standards.

[CuriousGeorge]

I wonder if anyone ever actually tried telling a lender "What? My current house? Oh, we plan to screw over the lender just like they screwed us. By the way, your docs will say fixed rate just like you promise, right?"

It would be an interesting conversation.

I'm looking for a local loan officer to help me through the process to see what we qualify for and what he's comfortable with.

All i know for sure is that i want someone that
A - has been in business since before the peek/crash
B - won't just tell me stuff because he thinks it's what i want to hear.
C - won't shred my tax returns, w2's, and other personal docs before skipping town like last time. (GRRRRRRRrrrrrrrrrrrrrrrr Gary I pray you acquire spastic colon!!!)

After finding a loan officer I'll move on to a real-estate lawer and maybe a CPA.

[knownick]

I mostly agree with dog here.

The "FBI" isn't going to much care about these sorts of cases.

Look over the mortgage application. Answer truthfully. If you've answered all of their questions truthfully, then no fraud has been committed. Simple as that.

[CuriousGeorge]

I just herd back from the first loan officer i've tried. he's telling me it's not possiable, no legal way, profile matches buy and bail, uphill battle, blah blah blah.....

Goes to show this guy is probably also a reator - they hate the buy-bail because they feel it keeps their future commissions low.

[CuriousGeorge]

By the way - if anyone in Arizona knows a loan officer that will give me a hand then drop me a line plz.

I'm sorta afraid i'll end up with what i got last time from a loan officer - Screw and Bail.

[camilami]

I did it in CA. No fraud - the application didn't ask what I was doing with my current (old) house. They wouldn't consider rental income, anyhow, so I qualified with both mortgages. I was completely honest about the old mortgage (verified with docs anyhow) and the current home value (verifed by property tax docs) that showed the old house underwater by 3x the value. My old house has 2 non-recourse mortgages, so they can't come after me for deficiency. My current home - purchased 1 year ago - is already under water. But at a good price and a great fixed interest rate, I'm here for the long haul. If my current bank made an issue of "intent to fraud" I could walk away from this home - also non-recourse loan. But why would they when I'm making my payments on time? Other than the foreclosure I have perfect credit, so if they looked at the circumstances they would see that I really had no choice and I'm still not a bad risk. So really, in a civil action, who would come after me? I'm not worried about the FBI. I hope they have more important things to deal with. And after extensive research, I haven't heard of anyone being criminally prosecuted for this. I feel very fortunate for having had the opportunity to find a way out of this financial mess while most people end up in bankrupcy.

[dogatemy]

Originally Posted by CuriousGeorge

By the way - if anyone in Arizona knows a loan officer that will give me a hand then drop me a line plz.

I'm sorta afraid i'll end up with what i got last time from a loan officer - Screw and Bail.

If you are in Arizona then check with Jeannie Bolger at Nova Home Loans. She has been in the business forever. The loan processor shares an office with the mortgage officer and the underwriter is about 25 feet away from both of them. They were communicative, professional and very efficient processing my loans. I personally know 3 people who have been through the process with Jeannie and all of them are satisfied with their experience.

http://www.novahomeloans.com/content.asp?page_id=3

[dogatemy]

Originally Posted by CuriousGeorge

I just herd back from the first loan officer i've tried. he's telling me it's not possiable, no legal way, profile matches buy and bail, uphill battle, blah blah blah.....

Goes to show this guy is probably also a reator - they hate the buy-bail because they feel it keeps their future commissions low.

I would not go around telling mortgage officers that you plan to default on your current home. This is akin to saying you are a credit risk obligating them to deny the loan. Notice I am not saying you should deceive the mortgage officer. I am only saying you should answer the questions on the mortgage application honestly.

If you want to avoid mortgage fraud then you will need to qualify for both the new and old mortgages at the same time which makes your intention with the current house a moot point.

I would not paint all Realtors with the same color. There are plenty of good realtors who are fighting hard, even if it is temporarily to their own detriment, to make sure people have a house they can afford. There is no realtor out there who wants to see anyone homeless and in many cases Buy & Bail is the lesser of two evils. This is especially true for families who have alot of kids that could not fit into a reasonably sized apartment or families with pets.

Good luck!!

[dogatemy]

Originally Posted by camilami

I feel very fortunate for having had the opportunity to find a way out of this financial mess while most people end up in bankrupcy.

Congrats! It is always nice to hear a success story!

[jakelabry]

Originally Posted by CuriousGeorge

I just herd back from the first loan officer i've tried. he's telling me it's not possiable, no legal way, profile matches buy and bail, uphill battle, blah blah blah.....

Goes to show this guy is probably also a reator - they hate the buy-bail because they feel it keeps their future commissions low.

You think maybe they might hate buy and bail because it could earn them some jail time? So, you are going to continue your search for a loan officer willing to commit mortgage fraud? I thought that's why we were in this crisis now - because too many banks, lenders, real estate agent (and even homeowners sometimes) willingly committed fraud or "fudged" a little bit. Good luck to you. Oh yeah, put a lawyer on retainer now.

[knownick]

Originally Posted by jakelabry

You think maybe they might hate buy and bail because it could earn them some jail time? So, you are going to continue your search for a loan officer willing to commit mortgage fraud? I thought that's why we were in this crisis now - because too many banks, lenders, real estate agent (and even homeowners sometimes) willingly committed fraud or "fudged" a little bit. Good luck to you. Oh yeah, put a lawyer on retainer now.

You have yet to explain what is "fraudulent" about truthfully filling out a mortgage application.

[jakelabry]

Originally Posted by knownick

You have yet to explain what is "fraudulent" about truthfully filling out a mortgage application.

What is "fraudulent," direct from the FBI website:

"material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan."

Federal Bureau of Investigation - FINANCIAL CRIMES REPORT TO THE PUBLIC FISCAL YEAR 2007

Seems pretty clear to me.

[knownick]

Guess I'm failing to see the omission. As dog said above, the road to hell is paved with good intentions and intent is nearly impossible to prove.

If I apply for a mortgage and clearly show my existing liabilities and assets - including an underwater house - and the lender approves my loan, what material misrepresentation or omission have I made? The approval and underwriting of the loan would have been made at that point with a full and complete understanding of my financial picture at the time.

An "omission" that would be relied on by an underwriter to fund, purchase, or insure a loan would be something like "gee, forgot to mention I have to pay $2,000 a month in child support and alimony". That's a financial data point that would obviously be very important to an underwriter. On the other hand, if you can afford two houses and get approved for loans on two houses based on honest and complete data, but later decide that the first house is a bad investment and walk on it - I can't see a court in the land that would consider that fraud. That's a business decision that had nothing to do with the writing of the original loans.


The "buy and bail" situations that I see running afoul of the law are akin to any other sort of misrepresentation - coming up with a fake rental contract, stating you intend to rent the house out when you have no intention of doing so, fudging appraisals or loan amounts, etc.