What's a Buy and Bail?
By Lisa A. TylerNational Escrow Administrator, Fidelity National Financial
In markets hit hard by plummeting home prices and rising foreclosures, the real estate industry has discovered a phenomenon known as the "buy-and-bail." In a buy-and-bail transaction the borrower is up-to-date on the mortgage, but the value of his or her home has fallen below the amount owed. This is called an "upside down" mortgage. The borrower continues to make payments on the upside down mortgage secured by his or her first home, while applying for a purchase money mortgage on another home, usually at a substantially lower price than the first home. The borrower typically tells his or her new lender that the original property is pending sale, or tells the lender one of the two properties will be rented as an investment property.
The loophole works as follows: The homeowner provides a rental agreement showing he or she will rent out the first home. The lender will allow rental income to cover as much as 75 percent of the mortgage payment on the first home when determining if the borrower can make payments on two homes, enabling homeowners to secure another mortgage they might not otherwise be able to afford. After the new property is secured, the buy-and-bail borrower allows the first home to go into foreclosure. Although the buy-and-bail owner's foreclosure will remain on his or her credit report for at least seven years, it is difficult to detect a buy-and-bail scheme prior to consummation of the new purchase. If the parties to the transaction disclose the scheme to the settlement agent, the new lender should immediately be made aware.
Another change related to today's real estate market is the growing number of real estate professionals who have put their expertise in dealing with lenders to work on helping troubled borrowers avoid foreclosure by negotiating loan modifications. As a result, our operations have been inundated with calls from the negotiators wanting us to act as bill collectors. Read "Loan Modifications" to learn how to avoid opening orders that might never close and do not involve the services of an escrow holder or the issuance of title insurance.
Pat Baldwin, escrow administrator from Fidelity's operation in Maricopa County, Ariz., also shares two stories with "Paying Off a Private Note" and "Indemnity Gone Wrong."
Lastly, on Nov. 17, 2008, the Department of Housing and Urban Development (HUD) published a final rule in its reform of the Real Estate Settlement Procedures Act (RESPA). While some of the more onerous provisions of the earlier proposed rule (including the closing script) have been removed from the final version, several remaining provisions impact the escrow settlement process. The new rule requires a closer working relationship with the lenders who provide residential transaction financing.