In an e-mail sent out today to business partners, Indymac warned about and provided general guidance regarding the “buy and bail” phenomenon allegedly sweeping the industry.
The Wall Street Journal brought the problem to light yesterday in an article that explained how underwater borrowers purchased nearby homes at a discount and then stopped making mortgage payments on their existing homes until they fell into foreclosure.
While it may seem like a complicated endeavor, the article noted that some borrowers were doing it with relative ease, while others received coaching from real estate agents and mortgage brokers.
And so now Indymac has warned business partners to be “extra vigilant” when their borrowers are looking to purchase owner-occupied homes if they already own existing property.
The e-mail said to be especially careful in hard-hit markets in Arizona, California, Florida, and Nevada, noting that lending to borrowers who are about to bail is much the same as lending to a borrower with a recent foreclosure, which is strictly prohibited by the GSEs and the FHA.
The mortgage lender advised that borrowers in these situations should generally have a minimum of 20 percent home equity in their existing property, no mortgage lates, and the capacity to repay current obligations.
Additionally, they should put down at least 20 percent on the new property, and “extreme caution” must be taken if their current property was recently listed.
The e-mail noted that “buy and bail” is becoming a significant problem, adding that the FHA, Fannie Mae, and Freddie Mac have already instructed underwriters to proceed with such deals cautiously.