THE PARTY
Lucky owned a condo in Las Vegas which he bought in 2005, and financed with a $220,000 loan. He paid $1,800 a month against the mortgage. He made good money as a health care worker at one of the hospitals and was recently promoted to manager. He always paid his mortgage on time, so his FICO credit score was good, and his financial future looked bright, even in the midst of the Great Recession.
Unfortunately for Lucky, he had one big problem- it was the Fourth of July and the year was 2009.
THE HANGOVER
His condo was no longer worth the $280,000 he paid for it. The adjacent unit recently sold at auction for $120,000. Lucky owed $100,000 more than his house was worth; he was upside down. He figured it would take 10 years before his condo went back up to the amount of his mortgage. He decided to do something about it.
THE SOLUTION
First, he began looking for another condo to buy. He bought the condo across the street at a foreclosure auction for $100,000. His payments for his new condo were only $800 per month. He moved out of his old condo and into his new condo. A UNLV student friend of his moved into his old condo and paid him a rent of $800 a month. Lucky was unhappy with the fact that he still had to pay his $1,800 monthly mortgage payment, which left him $1,000 “in the hole” each month. As such, he stopped making the monthly mortgage payments, but collected the monthly rent from his friend. Lucky also warned his friend about the upcoming foreclosure. Lucky became deliquent with his old condo mortgage payments, his FICO credit score dropped 200 points, his old condo went into foreclosure. But Lucky didn’t care because he already had another new condo, and as long as he kept current on his new condo mortgage payments they wouldn’t take it back, right? (hint: we don’t know).
HERE COMES TROUBLE
What did Lucky do? Buy and Bail.
What? When a homeowner buys another home while their FICO credit score is still good, than walks away from their old home which destroys their FICO credit score.
What did Lucky do wrong? An argument can be made that Lucky committed mortgage fraud. Moreover, Lucky may be liable for a deficiency judgment (the difference between what Lucky owed against his old condo and what it sold for at the foreclosure sale).
What did Lucky do right? He was able to own a condo at a much less expensive price, and he afforded the lender of his new home a profitable mortgage. He also provided his UNLV friend a place to stay–for a while.
Cool.