When you owe more than what your home is worth - we call that "Upside Down"! Now if you go to the bank and ask them to take less than what you owe it's called a "Short Sale".
Over the past few years the Short Sale has become huge. However, due to the time it takes for the lender to answer us many never really work out. But just like people got around financing issues they are getting around the short sale.
Sometimes they are necessary and other times they are just Wrong. Let' say you lost your job and have fallen behind in payments, the bank may approve a short sale. But what if you just want to move because your home is to small. That is Wrong. So the lenders changed the rules so this would stop some of the phoney short sales. Keep in mind many of these homes are sold below market value, thereby reducing other homes in the neighborhood.
As they say when one door closes another one opens. The other day I heard about a local builder that would sell one of his homes to a buyer, then offer to buy there home. Sounds like a great idea right? Wrong! First they tell the buyer to get an attorney, come up with a hardship story and they start a short sale with the offer from the builder. In the meantime, they continue trying to sell the buyers home until the new home is done or until another buyer comes along. It is Wrong or is it Fraud? Did they explain just what would happen to the buyers credit rating? Do they even care what they are doing to the values in the area? Sure the builder, the real estate, the new buyer and the seller are all happy. But who pays for the loss? It doesn't just dissapear into thin air.
Then the next day I receive a call from a For Sale By Owner (friend whose upside down) who was contacted by a local real estate agent, who said he had a buyer. Of course, that was to get in the door. He proceeded to explain that he could help them sell their home by doing a short sale on their current home and then help them buy a new home. He told them his assistant does this all the time. Again what about the credit? What about the area's values?
This all sounds like a wonderful idea but what about the people left in the old neighborhoods? What happens to their values? Will this now create a snow ball effect? When does it stop? Can Fannie Mae and Freddie Mac handle anymore losses? Better yet what about our financial institutions? How much more can they take?
There's always someone out there trying to work the system for all it's worth. Unfortunately, that usually ruins it for everyone else.
Ed & Cindy, I've heard some radio commercials the past couple of days that describe exactly what you are talking about in the first scenario. I tell ya, I had to shake my head and ask myself how the heck are they going to guarantee the sale of a home in this area? Then I thought a bit more and came up with the same conclusion you did.
Buy and Bail. We're seeing too much of it now and it further deepens the recovery here for us in Michigan.
One thing that I think is helping is that the lenders have changed the guidelines on issing new purchase mortgages if you already own a home. They really tightened up on those.
Unfortunately though this type of shenanigans has been going on for over a year now, so it looks like a new wave of foreclosures will be coming down the pipeline.
Russel yes it's sad but I hink we need to bring it out in the open so it is nipped in the bud quickly.
Kris I really hoped the new Fannie Mae guideline would stop the Buy and Bail but they are flying this one under the radar by using the builders PA. The builder is getting his home sold, buying homes under market and flipping them but leaving the us tax payers with the short sale shortage. It's just not right.