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Wednesday, June 11, 2008

Situational ethics?


From one of my real estate news feeds comes a story about a new and troubling phenomenon in the real estate market.

Some borrowers who are struggling to pay their mortgage and are dealing with big drops in property values are avoiding their problems by committing what some call fraud – and others call smart.

These owners are using their good credit rating to buy a second home at a lower price, assuring the lender they’ll rent out the first. But what they really end up doing is walking away from the first home, leaving the lender holding the bag.

Lenders call the phenomena “buy and bail.”

In some cases, real-estate practitioners and brokers who see nothing wrong with it coach home owners through the buy-and-bail process. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated.

"It's just a business decision," says Linda Caoili, a Sacramento real-estate practitioner. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

The trend may be short-lived. Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes, and insurance for both residences. The guidelines will make an exception only for borrowers who have at least 30 percent equity in their current home. Of course, some individuals still can qualify for that second loan because of a strong credit and cash position.

The position taken by Ms. Caoili seems to point towards a larger issue of the mores and norms of our society starting to break down. There was a time (and I guess I came from that era) where one stuck out tough situations and worked your way through them, even if it involved hardship and/or personal sacrifice. Now days it seems all too easy to just throw things away – appliance or kitchen gadget having problems, just toss it and buy a new one; got problems in your marriage, just get a divorce and find a new spouse; having trouble making your house payments, just walk away and buy a new house. Nobody wants to work ate fixing things or making them right anymore. I suppose it’s all a part of our “me-generation”, instant gratification, and throw-away culture; but, that doesn’t make it right. This buy and bail phenomenon is just what it has been labeled by some – a form of fraud.

I do feel a lot of sympathy for those who, through no fault of their own really, have gotten swept up in the tide of foreclosures and falling home values. I have heard more stories of innocent, albeit a bit na├»ve, people getting caught by the toxic ARM problem. Perhaps they should have been more prudent with credit, but many of these people have been hit by the double whammy of rising rates and falling values, in addition to things like rising energy and health costs and lower wages or loss of overtime. It doesn’t take much in each area when all of those factors come together in the perfect storm to work against a struggling homeowner.

I suspect that, if they would just look, the banks would find that most of these people are honest, hardworking folks who would become model borrowers, if they were allowed to work out a plan that they could afford. These people don’t want to lose their homes. They don’t want to buy and bail. They just want to catch an honest break and get back on their feet. Let’s hope that some of the banks start to realize that and push harder on programs to help, rather than to foreclose.

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