As the nation’s housing mess has rolled out, more than a few media reports have provided anecdotal evidence to support the idea that some borrowers are buying new homes for less money and then immediately defaulting on their current principal residence — called a “buy and bail,” most of the borrowers doing this are hopelessly underwater on their current mortgage. And they’re having to lie about receiving rental income on their current home in order to do it, in many cases, too. The Federal Housing Adminstration last week moved to stop the practice, saying that “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.” (By “vacate,” FHA officials mean “default on.”) Under guidance set forth in a Mortgagee Letter released on Friday, underwriters may no longer consider rental income from a property being vacated in most circumstances, and must ensure that the homebuyer can manage payments on of the full debt service of both mortgages — at least temporarily, while the FHA sizes up a more permanent set of measures to address the trend. The guidance applies even in situations where the FHA has not insured the mortgage to be “bailed” on, the letter said. There are some exceptions to the FHA’s temporary rule here: formal relocations and situations where the homebuyer has sufficient equity in the vacated property (defined as LTV of 75 percent or less). Read the full Mortgage Letter >> For more information, visit http://www.hud.gov.

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