Example: Buy and Bail
A homeowner purchased a house for $600,000 a few years ago. The value of the homes in her neighborhood have steadily declined for the past two years and the market value of her house is somewhere around $450,000 today.
Because of the declining values in the neighborhood, there are several houses that have been abandoned and gone into foreclosure. The houses were all built by the same builder when the subdivision was developed.
The homeowner still owes close to $600,000 on the mortgage because of her financing choice when she purchased the house. She thinks it would be a much better deal if she could abandon her $600,000 mortgage and get a new mortgage for an identical house down the street and the new mortgage was at the current market value of $450,000.
So, she goes to the bank and says she wants to buy an “investment” property in her neighborhood. She has a good job, good credit, and has never missed a mortgage payment. The bank, desperate to lend money to people like her, approve the loan quickly and she purchases the new house with a new mortgage at the $450,000 value.
The next step for her is to move her stuff out of the old house and into the new house. She stops making payments on the $600,000 mortgage and plans to stay in her new house indefinitely. After a few years, her credit won’t look too bad and she’ll be able to move again and get financing to purchase a new house.
