Saturday, July 5, 2008

Fannie and Freddie cracking down on the "Buy and Bail" scam

Looks like too many people were having fun with the "buy and bail" scam and ruined it for the rest of us.

The fed is now cracking down and putting it to an end...

Breaking News!

Fannie and Freddie are changing the rules on how payments on existing primary homes are treated when a buyer is purchasing a new home and plans to rent out the old house. In the past, we have been able to offset the payment on their existing home by showing a lease for the house and counting the rental income to cover the house payment.

Under the new rules, this will only be possible if there is a minimum of 30% equity in the existing home. So, if the house had a $200,000 mortgage on it, then it would have to be valued at over $285,000 to be acceptable as a rental conversion. Otherwise, the buyer has to be able to qualify with both house payments and has to have 6 months of house payments in reserve after closing. Ouch . . .

This change in guidelines appears to me to be directly related to a new phenomenon; people buying a new house and then letting their old home go into foreclosure after closing on the new house. I have been reading about this on the web. The idea is if you owe more than your home is worth then you go out and buy a new home at a great price. You indicate that you are going to be renting the old house out. After closing on the new house you stop making the payments on the old house which has negative equity and it goes into foreclosure. Sure your credit is wrecked but you already bought a new house and your bank loses all of the money on the old house. Some great scam eh?

I don’t know who comes up with these ideas but it is bad for everyone. Forces home values down further and adds to the steep losses which are seriously undermining the banking industry in the U.S. Whatever happened to the idea of living up to your obligations?

The bottom line is that the effort to close up loop holes like this is making it harder for legitimate buyers to keep their existing homes, rent them out and buy a new house. Stay tuned. The currents are changing on a daily basis and I’m just trying to keep you informed.

Written by Ken Mascia
Oxford Financial, 248.644.1200
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