WASHINGTON -- The Federal Housing Administration is warning its lenders to be on the lookout against borrowers who "buy and bail." It's a practice by some borrowers that seems to have its roots in the high price of gasoline.
The phrase refers to homeowners who purchase a more affordable home with the intent to stop making payments on their previous mortgage.
FHA said it's a growing trend.
"Recently, 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. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment or are taking advantage of other home buying opportunities arising in the marketplace," FHA Commissioner Brian Montgomery wrote in Mortgagee Letter 2008-25.
To stop what it calls "an unscrupulous practice," FHA said underwriters may not consider any rental income from the property being vacated except under certain circumstances. For example, if the loan-to-value on the current residence does not exceed 75%, the rental income may be considered as long as it is reduced by the appropriate vacancy factor. Rental income may also be considered when the borrower is relocating to work for a new employer that is located beyond a reasonable commuting distance.
Rental properties reflected on tax returns are not included.
FHA said the policy is in place on a temporary basis as the agency analyzes the situation to determine whether permanent measures need to be taken.
Fannie Mae has instituted a similar policy.