Are Banks Digging Their Graves Willingly?

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.

2 Comments on “Are Banks Digging Their Graves Willingly?

  1. Very interesting post Charles. Thanks.

    It sounds like the lender making the loan on the second home doesn’t own the mortgage on the first home, so they will not take a loss on that one.

    This is the classic prisoners dilemma-that lender might make money on the new loan, but if other lenders facilitate buy and bails on this lender’s other mortages, they will lose money there. It is best for all lenders to steer away and not shoot each other in the foot. But since one can’t coerce each other to stop, the best financial outcome is to join the others.

    What I’m interested to know is how does the second bank know the borrower is walking away from the first home?

  2. We’re seeing this more and more too in Tucson. I recently read an article about an ex-broker who gutted his home before foreclosure and was sentenced to jail time for it (http://www.usnews.com/blogs/the-home-front/2008/6/26/man-guts-home-gets-jail-sentence.html), and I think this should serve as warning to everyone thinking of doing something like this.

    It really is frustrating when I am showing foreclosures to clients and I see the sad state some of these recently built homes are in; broken granite countertops, cabinet doors torn off, holes in walls, stains on carpets. A total lack of pride and regard for the house.

    I have worked with a few clients who have been in this situation and the lender of one of them required a signed rental agreement for their old house before agreeing to lend to them for the newer (and cheaper) home they were looking to buy. Interesting idea but I have a feeling it won’t stem the “buying and bailing””.

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