There’s Always Someone Around To Ruin It For The Rest Of Us

 I received this from an anonymous source that claims it’s a memo from Fannie Mae to Lenders.  I believe it probably true. 

FNMA has released their proposed policy to lenders for comment, however, their final policy may not be released for a while.  

In the current real estate environment of soft markets and declining property values some borrowers are finding they are upside down on their home and owe more than the property is worth.   This has led to a new scheme that we’re seeing in many areas of the country referred to as “Buy and Bail”.  

Here is an example of the new scheme that we recently witnessed:  The borrower owed $430,000 on their existing house but the value of the house was roughly $270,000.  Houses very similar to the borrower’s current residence were selling for $270,000 in the same or competing neighborhoods.   The borrower applied for a loan to purchase a new home and claimed that he will lease out the existing house.   Once the new transaction closes, the borrower intended to walk away from the previous home leaving the lender with yet another foreclosure.

This scheme has a high risk of fraud because the lease agreement on the borrower’s existing house is often fraudulent.   In an effort to stop this from happening we are implementing the following guidelines immediately for any borrower who has an existing home that is either listed or will be kept as a second home or investment property that is in either a (i) Soft Market Category 4 or 5 or (ii) area in which the appraisal indicates that values are declining or there is an over supply or a marketing time in excess of 6 months.

Existing Property is Listed For Sale:
The borrower must qualify for both the PITI on the existing property and the PITI on the new proposed property.

Conversion of the existing property to a Second Home:
The borrower must qualify for both the PITI on the existing property and the PITI on the new proposed property.
The borrower must have 6 months PITI in reserves for BOTH properties.  We may consider reserves of no less than 2 months for both properties if there is any documented equity in the existing property. 

Conversion of the existing property to an Investment Property (with a positive equity position)
75% of the rental income may be used to offset the PITI of the existing property if the borrower has a positive equity position in the property.  The equity position must be based on a current AVM and the total liens against the property.

The rental income must be documented by a fully executed copy of a lease that extends for at least a 12 month term and receipt of a security deposit from the proposed tenant deposited into the borrower’s account.  The loan specialist must verify the lease term and rental amount by contacting the tenant by phone.

Conversion of the existing property to an Investment Property (with a negative equity position)
If the existing property is in a negative equity position NO credit may be given to any proposed rental income and the borrower must qualify with the full PITI of both properties.
The borrower must have 6 months PITI in reserves for BOTH properties.

I’ve not seen this happen in the Walnut Creek home market, and I did not publish this to encourage anyone to try to committ fraud.  May point is that this industry is self correcting and we will come out the other end of theis mess with better and more accurate guidlines and less creed.