Bailing on Mortgages: Just Because it’s Legal, Doesn’t Mean it’s Right
I hear from a lot of critics who blame the high number of housing foreclosures on greedy homeowners themselves.
These buyers stretched themselves financially, often taking out mortgage loans with artificially low initial interest rates, to get themselves into larger, nicer homes than their monthly income would normally allow them to purchase. When these mortgage loans – usually adjustable-rate mortgages – reset to higher interest rates, owners suddenly couldn’t afford their higher monthly mortgage payments. Eventually, they fell behind enough to enter the foreclosure process.
I always tell these critics that while some homeowners were greedy, the majority of those who have lost their homes during the housing slump have done so because of some unpredictable event such as a job loss, a serious injury or a costly divorce. Others may have taken on risky mortgages on the bad advice of a loan officer.
In other words, there is plenty of blame to go around.
It gets harder to defend homeowners facing foreclosure, though, when you read stories about people who simply walk away from their mortgage loans and then buy another house for a lower price. And this is happening more often than you’d think.
There is a growing number of homeowners who are basically abandoning their homes as they near the foreclosure process. They have no intent of working out a new payment plan with their mortgage lenders. They don’t even try to stretch themselves to make those mortgage payments. Instead, they simply walk away from their problems.
And the worst part? These homeowners are then taking advantage of the slumping housing market to purchase a new residence — often one in the same neighborhood and the same size — for a far lower sales price.
This move, which is often called the “buy and bail,” isn’t illegal. There is nothing to prevent homeowners from purchasing new primary residences before selling their existing homes. In the end, the homeowner is left with a new house with a lower mortgage payment, while ignoring the first home that has fallen into foreclosure. Not a bad deal.
Problem is, while such a move may not be illegal, it is highly unethical. It’s also a terrible move for a homeowner’s credit record. A foreclosure can stay on a credit report for seven long years. Try taking out another loan with that mark on your record.
This housing crisis has brought out a lot of bad behavior on the part of homeowners, mortgage lenders, real estate agents and government officials. The “buy and bail” plan is, unfortunately, just one more example of it.