FHA Warns Against 'Buy-and-Bail' Transactions

The Federal Housing Administration is warning its lenders not to finance "buy-and-bail" transactions in which the borrowers are planning to default on their old mortgage as soon as they move into their new home. These borrowers generally tell lenders that they are planning to rent their current home after they move into a less expensive house. To stop this "unscrupulous practice," the FHA says it is temporarily changing its underwriting guidance to ensure that the borrower can make payments on both mortgages without relying on rental income. The underwriting analysis "may not consider any rental income from the property," the FHA says in a mortgagee letter, unless the borrower has a loan-to-value ratio of 75% or less. Fannie Mae has instituted a similar buy-and-bail policy.