Some Buy a New Home to Bail on the Old

Wall Street Journal (06/11/08) P. A3; Timiraos, Nick
More homeowners having trouble making their mortgage payments and who owe more than their properties are presently worth are engaging in a scheme known as "buy and bail," in which they use their good credit to purchase a second home and then let the first property fall into foreclosure. They often deceive the lender into believing that they will rent out the first residence, but Fannie Mae plans to adopt new guidelines in the next week that require them to provide executed lease agreements or other evidence that they are serious about renting out the home as well as provide proof of their ability to make mortgage, tax and insurance payments on both properties. The strategy is popping up in California and Arizona, where state law makes it difficult for lenders to file suit against borrowers unless a personal line of credit was used to buy or refinance the home. Many lenders and real estate agents call the practice fraud, and there are concerns that borrowers are being helped by agents and brokers.