The feature story in July 7th’s Business week is somewhat mind boggling. The Housing Abyss story is fairly long but the idea of “buying and bailing” followed two paragraphs later by the common damage to foreclosed homes makes one think that 2+2=5 in bankland:
[An agent] in Henderson, Nev., says he has been flooded with calls from people interested in “buying and bailing”—that is, buying an additional house while their credit is still good, then walking away from the old one unless they can cut a favorable deal with the lender. So far the number of people who have done so appears to be small. But Hawks says banks are receptive to lending for such purchases because they figure the buyer will be able to afford the new, cheaper place. Also, says Hawks, they know that, since the buyer’s credit will become damaged, he or she won’t pull the same trick on them, at least for a few years.
Two paragraphs later:
Mass foreclosures accelerate a neighborhood’s decline, triggering a spiral of abandonment and decay. A survey of agents this year for Inside Mortgage Finance by Geosegment Systems and Campbell Communications found that about half of foreclosed properties have significant damage, which reduces a property’s value by about 25% (e.g., $100,000 on a $400,000 house). Ruined floors and carpets, holes in walls, and missing appliances lead the list.
Banks are knowingly receptive to a buyer purchasing a second home so they can repossess a house that is going to be trashed? Maybe the buyer can strip the house before foreclosure and put the parts on Ebay to pay for the first seven years of mortgage payments on the second home! The whole thing requires some long-range planning on the buyers part as it is going to trash your credit and perhaps a total lack of morals but the American way is all about the bottom line.
Doesn’t seem like good banking practice to as a way of making new loans.