It took three months, but the FHA is finally, formally addressing the issue of “buy and bail borrowers,” according to a recent mortgagee letter.
“Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence,” said Brian Montgomery, Assistant Secretary for Housing, in a statement.
Unfortunately, these borrowers are buying the new, cheaper properties, and then walking away from the mortgages on their former properties before their credit goes bad.
And so now the FHA is implementing new rules aimed at tackling such practices, by effectively stamping out the use of rental income on the vacated property for qualification purposes.
“Due to FHA’s concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages.”
The only exceptions to the new rule are if the homeowner is relocating with a new employer or if the vacated property has a loan-to-value ratio of 75 percent or less.
So that means all those underwater borrowers thinking about buying a new property on the cheap will likely face more hurdles, though I’m sure it will only be a matter of time before methods of circumvention present themselves.
The solution is temporary, and will be analyzed by the FHA to determine whether such a rule will become a permanent fixture.
Back in June, Indymac got wise to the so-called “buy and bail” borrowers and took similar action to prevent the practice.
It’s unclear why the FHA was so slow to respond.