The “turn and burn” a.k.a. “buy and bail” strategy – is a method sometimes used by people whose homes are “underwater”. It is increasingly used by the wealthy with very large mortgages whose homes are worth significantly less than what they owe. This little trick reared its ugly head after the housing market began to go south, even before the economic meltdown in September 2008.
To refresh your memory, this method involves a person who uses still-good credit to purchase a second home. As soon as the loan closes, they stop making payments on their current home and move into the just-purchased house. For the skeptics out there, I assure you it’s still possible to get investment loans. You just need 25% down and enough discretionary income to afford the additional payment and good credit.
A study conducted by Experian had some pretty surprising factoids. One of them was that the better the paying history, the more likely borrowers were to walk away from their homes should they be under water. The Experian study also concluded that 18% of the borrowers with mortgages 60 days past due in the fourth quarter of 2008 were acting strategically, up from 3% — “barely noticeable,” the report says — in late 2004. (What I want to know is how Experian knew these 60 day lates were “strategic.)
Most defaults, however, are driven by financial distress. Defaults due to troubled finances grew from 31% to 51% of loans in the same time frame, the Experian study said.
Isn’t this a crazy strategy? Don’t these people worry about their credit ratings? This “turn and burn” strategy will definitely come back to haunt you. Your credit score most assuredly will plummet. If you have enough money in the bank, however, you might not care and ride out the bad credit storm paying cash as you go.
Think about it. If you have a house worth a million dollars and you owe two million, you might think walking away from a million dollars in obligations is worth ruining your credit, even if you can afford the payments. Just like anything else to do with money, the well-to-do know how to navigate the existing financial waters and profit from it much better than those who have limited monetary means and/or sophistication. The rest of us are left holding the bag.
Have you thought about walking from your house because it’s so underwater? What did you decide? Tell us about it by leaving a comment!
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I admire your efforts to keep folks out of trouble. And with all due respect to your desire to keep us informed of what banks will and won’t do with Sub-To, I can say from experience that banks do NOT “invoke” the DOSC to assure [that] the TRUE owner of a property is on the hook,” as you’ve postulated.