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Residential Real Estate: FHA closes ‘buy, bail’ loophole

The Federal Housing Administration closed a loophole in its lending rules that it said may have allowed some homeowners to dump and default on a more expensive home in order to get a cheaper one.

The FHA, along with mortgage lenders, said that as fuel prices rose, some homeowners were relocating nearer to their employment. The homeowners in turn planned to rent out their former residences.

However, the FHA said it has become concerned some borrowers were providing misleading financial information about those sales with the intention to “buy and bail.”

In response, the FHA stopped allowing prospective buyers to use the proposed rental income from the soon-to-be-vacated house unless: The buyer is being transferred by a current employer or is relocating with a new employer, or if the buyer has a loan-to-value ratio of 75 percent or less.

“Buy and bail” is when a homeowner purchases a more affordable home than the one they live in with the intention of defaulting on the first home.

“They should have closed this loophole two quarters ago,” Realtor Timothy Brown of Creative Property Services in Santa Rosa said.

“With all of the other lending issues, the market tightened up before the government stepped in. This is the one place where they could have prevented additional foreclosures, but they are just getting around to it now,” Mr. Brown said.

Mr. Brown said the rule change is likely to put upward pressure on rents and could prevent an investor from being able to turn their first home into a rental.

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Home sales at the high end and the low end of the market are looking somewhat better, but there is little activity in the middle of the price range.

“Everybody has gotten really busy,” said Mike Silvas, president and chief executive officer of Morgan Lane, a real estate brokerage serving Marin, Napa and Sonoma counties.

In Marin County, home sales over $2 million have increased 2 percent over the course of two years, said Rick Turley, regional president of Coldwell Banker. At all price points, however, there has been a 17 percent decline in Marin.

Meanwhile, in Sonoma County, half the homes sold this year were bank-owned properties in the lower price ranges.

In both Sonoma and Marin counties, the higher the price point on the homes, the more likely they seem to be holding their value.

Marty McCormick of McCormick and Company, a mortgage lender in the North Bay, said after the federal takeover of Fannie Mae and Freddie Mac, interest rates on 30-year year loans dropped a quarter to three-eights of a percent.

Mr. McCormick said that annually, the lowest prices are in February and October, so to have that occur now is good for the market. He also has seen many houses sell at above the list price. These are the houses at the lower end of the market, and when priced well, there is a tendency now for multiple buyers to place offers on homes.

However, that is not occurring yet in the mid-range priced homes, Mr. McCormick said.

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A study by the California Association of Realtors, “2008 Survey of California Home Buyers,” found 77 percent of first-time home buyers said lower prices played a role in their decision to purchase a home.

The Internet is where buyers are turning to for information. According to the CAR study, “home buyers began their search process by using search engines on the Web to identify real estate sites, where they found housing-related information on a wide rage of geographic areas and accessed comprehensive information on homes for sale. As they refined their process and narrowed down the properties they wanted to view, they found their agent’s site to be most useful.”

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Submit items for this column to

Jenna V. Loceff at 707-521-4259, jloceff@busjrnl.com or fax 707-521-5292.