“Underwriters aren’t stupid and are looking for people who are committing loan fraud. Once they catch a few of these “smart” people and prosecute them, fewer people will be considering it.”
That’s going to be an interesting development. In a strict sense, I don’t think this is loan fraud. The borrower bought the first house with the intent of paying off the loan. He buys the second house with the intent of paying off the second loan. The lender for the first house will get screwed by the default. But if it was a no recourse loan, what can the first lender do?
Also, it seems to make financial sense for the lender of the second home to approve the loan (assuming 25% downpayment or so). The second lender will see a borrower with good credit, a large downpayment, and have as collateral a “rental” unit that is probably cash flow positive. Even if the second lender suspected that the first lender would get screwed, would it matter? As long as the second lender believed that it would make money on the deal, I think the deal would go through.
Of course, most people won’t be in the position to be able to do this. But some definitely will and it’ll be interesting to see how it all plays out.
