What Does it Mean to Buy and Bail?

“Buying and bailing” refers to the act of buying a second property and allowing a first home to fall into foreclosure. Homeowners who purchase second properties in this scenario are typically “upside down” on their primary residence, meaning they owe more on their first home than it is worth in the current market. It's likely that they had an adjustable rate mortgage and their monthly mortgage payment grew to a payment they could no longer afford. For some, an easy solution appears to be buying a second property at a depressed price with a fixed rate mortgage in order to lower their monthly mortgage payments. At the same time, they let their first home fall into foreclosure hence the term buying and bailing.

You may wonder why a lender would loan someone money for a second property when they are already having difficulty making the mortgage payments on their first home. Typically, the buying and bailing homeowners will state in their loan applications that they intend to rent out the first property, but it should be noted that lying on a loan application constitutes fraud. Fannie Mae and Freddy Mac have instituted rules to curb the practice, but it continues. In addition to fraud, homeowners could get themselves into deep water when dealing with foreclosure and second properties.

Things to Consider About Foreclosure and Second Properties

There are two different scenarios that can occur with foreclosures and second properties. The first is the buy and bail situation explained above where the homeowner buys a second property and allows the home that has been his primary residence to go into foreclosure. The second is where a homeowner has a second property, perhaps a vacation home, and allows that second property to go into foreclosure.
When a home goes into foreclosure it will be auctioned off usually for a much lower amount than what is actually owed on the property. The difference between the amount owed and the amount received at auction is called a deficiency balance.

How the settlement of the deficiency balance will be handled varies greatly depending on where you live and your state's laws regarding foreclosure and the enforcement of deficiency balances. In about two-thirds of U.S. states, deficiency balances are treated like all other unsecured debts, and lenders may pursue a borrower after foreclosure by seeking a deficiency judgment. This allows a lien on the second property for the amount still owed on a previous mortgage. In states such as California and Arizona there are restrictions on lenders, and they may not have that option if the original home was a primary residence.

If you have a vacation home that goes into foreclosure, and end up owing a deficiency balance after foreclosure on that second property, the lender may file a lawsuit against you to collect the debt. This could result in garnishment of your wages, levies on your bank accounts, and/or liens placed on your property, including your primary residence, depending on your state's laws relating to the enforcement of judgments.

After foreclosure, the lender, otherwise known as the judgment creditor, may be able to force the sale of your primary residence to obtain the money needed to pay off its judgment depending on the state in which you live. Judgment creditors are more likely to pursue a forced sale of your property if you have a lot of equity in your home. Therefore, if you have a substantial amount of equity in your primary residence, you may want to think long and hard before allowing a foreclosure on your second property. A consultation with an attorney specializing in real estate law is advisable before deciding to let a foreclosure on a second property to occur.

UPDATE: Many homes under contract will not be able to close after September 30 if Congress does not act

In an update to a previous post, the Senate voted in favor of an amendment that would reinstate the heightened conforming loan limits for mortgage loans backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). The amendment, introduced by Sens. Johnny Isakson (R-Georgia) and Bob Menendez (D-New Jersey), passed late Thursday with a 60 to 38 vote. 

The conforming loan limit was previously increased on a temporary basis to $729,750, but the rate expired September 30 and returned to its original rate of $625,500.  The house still needs to approve, if approved the conforming loan limit will rise again to $729,750 and remain there through 2013.

Green Building is the Future for Real Estate

Eco-friendly home designs are one bright spot in today's struggling real estate economy. As homeowners look to buy new, green-constructed homes, real estate builders are doing everything they can to lower the cost of living with energy and environmentally efficient designs.

The Appraisal Institute, the nation’s largest professional association of real estate appraisers  released a form intended to help analyze values of energy-efficient home features. It is the first of its kind intended for appraisers' use.  If you have invested in green energy products in your home, ask the appraiser to include option addedum to the Fannie Mae 1004.

Builders and home owners have been hesitant to add green energy feature in their home because there was no way to show the value in the appraisal process in getting a refi or selling the home.  Now they can!

How to Achieve LEED Certification

 

LEED certification works by awarding points for factors like air quality, water conservation, and energy efficiency based on the design of homes and office buildings. Some of the ways buildings and homes gain high LEED marks include using green materials for flooring, paint and windows, and by installing equipment like dual-flush toilets and Energy Star appliances, which use less electricity compared to older appliances.

The Natural Resources Defense Council estimates that an LEED certified green building can cost up to two percent more in upfront costs and, as LEED rises in popularity, many eco-friendly building materials are beginning to fall below standard construction costs of an average non-LEED home.

In 2009, the number of homes receiving LEED certification tripled compared to 2008 with more than 3,000 new buildings and homes. As more than 155,000 architects, contractors and consultants passed a USGBC test to become a LEED accredited professional or green associate, everyone in the developer community expects this trend to continue to lead the economic reform to the real estate market in the future.

Fannie Mae Website - Short Sales & Foreclosure

I came across a website for consumers that address questions about foreclosure, short sales and ways to stay in your home. It allows you to see if your mortgage is owned by Fannie Mae, contact a housing counselor and provide a financial checklist.

Click here for the Fannie Mae Website