Buying & Bailing: Walking away from ‘underwater’ mortgage has pitfalls

You bought your place for $350,000 in 2006. Today, you might get $175,000 for it. You owe at least $100,000 more than it's worth.

So you wonder: Could you maybe, you know -- just thinking out loud here -- perhaps buy that exact same model across the street for $150,000, walk away from your underwater mortgage and start over with a sane housing payment? And would it be so wrong if you did buy and bail?

It's a familiar fantasy for thousands of Las Vegans. Some national estimates claim at least half of the city's homeowners owe more on their homes than the properties appraise for.

But good luck purchasing a new place and walking away from the old. Experts say exceedingly few homeowners possess the financial wherewithal to indulge in the practice, which grabbed national headlines in a recent Time magazine cover story.

Time followed a Las Vegas real estate agent named Brooke Boemio, who told the magazine's reporter that she "finds clients who owe more on their house than the house is worth ... and sells them a new house similar to the one they've been living in at half the price they paid for their old house. Then she tells them to stop paying the mortgage on their old place until the bank becomes so fed up that it's willing to let the owner sell the house at a huge loss rather than dragging everyone through foreclosure."

Boemio told Time that the process can take nine months, and many owners rent out their old homes during that lag and pocket a profit.

"Tons of people were doing this," Time wrote.

That's not so, local attorneys and sales agents say. Simple economics makes such a maneuver impossible for the vast majority of homeowners.

Consumers who try to obtain a new home loan while overleveraged on their current primary residences won't get far, even if they lie on their mortgage applications, said David Horton, with the law firm Salas & McQuigg.

A certified credit check will turn up the existing mortgage and scuttle the deal.

"If your debt-to-income ratios are that out of whack, you will not qualify for a loan," Horton said.

Arthur Marvin, a state-certified instructor for short sales and foreclosures, said he has heard one or two stories about people buying another home while letting their first home go, but it's the exception rather than the rule.

Realtor Tom Love of Realty Executives in Las Vegas said he had one client successfully complete the buy-and-bail process, but it was before new lender regulations cracked down on the trend. However, the client was then disqualified from any possible short sale by his lender.

"They pulled his credit and based their decision on not approving a short sale on his actions to purchase a home and walk away from his original residence," Love said.

Lenders got wise to the buy-and-bail strategy, said Robin Camacho of Top10RealEstateValues.com. Unless someone can show they have enough income to make payments on both homes, the bank isn't likely to make the loan on the new home.

"It does happen a lot, but I've never had a client do this to my knowledge," Camacho said. "I've had a few prospective clients that I suspected were considering this. But when I let them know the bank isn't going to loan them money unless they can afford two payments, I don't see them again."

HOW IT MIGHT WORK

Today, buying and bailing will work only if you can pay cash for the home you're purchasing, or you can find a co-signer to help you close the deal. And that's a pretty small universe of people, said Jackie McQuigg, owner-attorney of Salas & McQuigg.

Just one of the 50 clients McQuigg is working with on short sales has the cash for a second place. (The client is not bailing, but taking his first home through the short-sale process, McQuigg said.)

"In theory, it's not a bad idea; but it's a huge problem for most people," McQuigg said. "Even with (median) prices where they are, at $100,000 or $150,000, a lot of people just don't have that money sitting there."

Added Marvin: "These people have money and they have credit. You can be in foreclosure and go buy a second house with 20 percent down as long as you qualify. You have a job, you're making $60,000 to $70,000, your FICO score is 800."

Robert, who asked that his last name not be used, said he had no choice but to bail on a two-bedroom townhouse he bought for $249,000 when the interest rate reset to 9.9 percent from 7.9 percent and the lender, City Residential Lending, wouldn't work with him.

He purchased a four-bedroom single-family home in the southwest last year for $210,000 and planned to rent out the townhouse, but the prospective tenant lost his job. He got stuck with a $2,400 payment on a townhouse that would rent for $1,200.

"It felt horrible to do it, but what else was I supposed to do?" Robert said of his decision. "I feel like they tried to rip me off. It wasn't fair business. I did everything in good faith. Why were they taking it to 9.9 percent? Because that's the maximum legal allowable."

Asked to comment on whether the Greater Las Vegas Association of Realtors has a policy on buying and bailing, and just how common the practice might be locally, the trade group's president, Sue Naumann, said transactions such as the ones Boemio described "violate our association's strict code of ethics and are not tolerated."

Naumann said Boemio hasn't completed her required orientation class or taken the pledge to abide by the association's code of ethics. Therefore, Boemio's not a Realtor, Naumann said.

Officials with the Nevada Real Estate Division know about the Time article and are "taking appropriate action," said Elisabeth Daniels, a spokeswoman for the state Department of Business and Industry, which oversees the Real Estate Division.

The top legal qualification for a real estate license is a "good reputation for honesty, trustworthiness and integrity," Daniels said.

Nevada law also requires that sales agents disclose to each party to the transaction any material and relevant facts, and it mandates fair dealings with all parties to a transaction.

If the state Real Estate Commission finds violations of the law, it can fine a licensee and suspend, revoke or downgrade the license.

Boemio didn't respond to an e-mail. A receptionist at her brokerage, Coldwell Banker Wardley Real Estate in Summerlin, said Boemio no longer works there.

If Boemio isn't interested in defending buying and bailing, McQuigg will. The practice is neither immoral nor illegal, McQuigg said. No state laws prohibit stopping payment on one mortgage after you've obtained another. And those with qualms about shafting banks should consider current events, she said.

"I do not feel the average homeowner here or elsewhere was responsible for this debacle," McQuigg said. "I think a lot of big banks were way more responsible; and they've been bailed out, I might add."

A LOOK AT NEVADA LAW

Nevada law tacitly agrees with McQuigg's take. A new statute says lenders can't chase homeowners for more money if the owners walk away from their properties. The state has essentially told banks that they took a chance on risky mortgage-backed securities, and they're on the hook for the bad gamble.

That doesn't mean McQuigg would counsel clients to buy a new home and walk away from the old. Consumers with home-equity loans in particular should think twice before trying the maneuver.

If a homeowner walks away from a mortgage, the lender of the primary mortgage gets the property back. The home-equity loan converts to unsecured debt akin to a credit card, and that brings a six-year statute of limitations on collection efforts.

"We get a little perturbed by advice given out by real estate agents, because they don't look at what happens, what's exempt with creditors," McQuigg said. "They don't see what kinds of problems can come up."

Whatever homeowners do, they must be honest, and account for their circumstances when applying for a new loan. Falsifying information on a mortgage application is illegal.

"We get clients who don't want to admit things on their applications, but we are definite with our clients. Don't lie about anything, and fill out the application completely. Even on short sales, we tell them, 'You have to state things,'" McQuigg said.

Mandy Peacock, a licensed mortgage consultant with AAA Home Rescuers in Las Vegas, said there is a responsible way to walk away from a mortgage with minimal credit damage.

Homeowners can try a short sale or deed in lieu of foreclosure while keeping payments current. Nevada is a "deficiency" state, which means banks can come after someone for the difference in what is owed and what the bank nets in a sale.

"They've got to find out what's best, but there are so many negative aspects of walking away," Peacock said. "A deficiency will haunt them for a long time. It's a nightmare on their credit, plus the tax liabilities."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.