When it comes to mortgage news, the media have been pretty sheeplike, mindlessly bestowing blame on the scapegoat-of-the-week, spewing anecdotes so they don’t have to do any actual journalism or perform legitimate research (yes, with data and everything. Sheesh). I resent this largely unbalanced view because it seems the result of laziness or the desire to inflame rather than inform–nor is it fair to the vast majority of hard-working and honorable people in a tough profession.
However, last week’s Wall Street Journal blew me away with an article about lenders and real estate agents who are actively helping borrowers exploit an underwriting loophole to deliberately burn their current lenders. These scumballs are actually out there trolling for this kind of business — I guess agents don’t care as long as they get their commission and apparently these lenders don’t have a problem with screwing their own either.
It’s been dubbed “Buy and Bail” and it works like this: As most of you know, a borrower who can’t sell a current home can often qualify for a new home if he or she converts the old one to a rental and obtains a rental agreement. The agreed-on rental income (usually 75% of it) is added to the borrower’s income and if the debt-to-income ratios look okay the second lender grants a loan on a new property.
The loophole is being abused by homeowners with second thoughts who see houses just like theirs selling for a lot less now. So certain real estate employees (I hate to use the term “professionals”) and their partners-in-crime in the mortgage industry help these families burn their lenders. With the guidance of their commission-craving friends, the homeowners get someone to sign a rental agreement, obtain an approval for a new loan, buy that home, and then let the old one go into foreclosure. They use the same excuse over and over, “It’s just a business decision.” Sure. Now, I’m no lawyer, but check out the definition of fraud in Nevada:
NRS 205.330 Fraudulent conveyances. Every person who shall be a party to any fraudulent conveyance of any lands, tenements or hereditaments, goods or chattels, or any right or interest issuing out of the same, or to any bond, suit, judgment or execution, contract or conveyance, had, made or contrived with intent to deceive and defraud others, or to defeat, hinder or delay creditors or others of their just debts, damages or demands; or who, being a party as aforesaid, at any time shall wittingly and willingly put in use, avow, maintain, justify or defend the same, or any of them, as true and done, had, or made in good faith, or upon good consideration, or shall alien, assign or sell any of the lands, tenements, hereditaments, goods, chattels or other things before mentioned, to him or them conveyed as aforesaid, or any part thereof, is guilty of a gross misdemeanor. [1911 C&P § 430; RL § 6695; NCL § 10382]—(NRS A 1967, 502)
So the friend who willingly signs that rental agreement, the agent and / or seller who encourages the buyer to defraud the current lender, and the new lender who walks them through the whole lie could be seen (and hopefully prosecuted) as contriving, wittingly or unwittingly to hinder creditors of their just debts… Clearly their intent is to defraud and determining if you have broken a law is many times predicated on your intent as much as your actions. Mortgage lenders’ trade associations and the NAR should swiftly condemn these actions and expel these bad-actors before the entire industry looks more like a cesspool that it already does.
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{ 7 comments… read them below or add one }
Perhaps the colloquialism should be ‘Buy & Jail’.
That’s great! Hope so!
Wow it seems no matter what the mortage / real estate market environment there is always people trying to defraud the system. I was unaware of this new one. Thanks for the information I will put the word out.
Yeah, can you imagine if someone walked into these people’s new homes, put a gun to their heads and said, “Hey nothing personal. It’s just a business decision. It doesn’t make sense for me to buy stuff or earn my own money when I can just take yours.” Couldn’t happen to nicer people
These same kind of attitudes are what killed stated income loans. Instead of using them for what they are intended for, it was an excuse to get any fry cook a $500k home.
Unfortunately, like stated income, rental agreements will probably go the way of the dinosaur and then people who are legitimately renting their property will no longer be able to get financing.
There will always be people looking to exploit loopholes. It is unfortunate because the professionals in the business are the ones who ultimately pay the price.
A lot of this could be prevented if becoming an LO were harder and individual LOs were required to be insured like medical malpractice on doctors in order to take responsibility for the loans we originate.
I completely agree about national standards, licensing, and responsibility. I also think that if states like California are going to let people off without allowing lenders to collect deficiencies on foreclosures there should at least be an exception for fraud
Well, that just stinks. I hope the FBI took notice and finds these folks and makes an immediate example of somebody.
When will they ever learn!
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