This is a new term I heard in class from my real estate agent students. It describes a home buyer shopping for a move-up home; a nicer home in a nicer neighborhood. The buyer has an existing home and the home’s value has dropped so far that in order to sell, they would have to go through a short sale approval process.
In order to qualify for any kind of short sale, the home seller must provide proof to the bank being shorted, that they do not have the funds to pay back the shortfall. If they DO have the money, then instead of a short sale, we have a “seller brings cash to closing” transaction. In a Shop, Swap, and Drop transaction, the home seller actually DOES have the money and/or assets to makeup the difference between what is owed to the bank, and the home’s current, much lower value.
But…the home seller doesn’t really want to hand that money over to the bank. So instead, the home seller doesn’t sell. Instead, he/she becomes a home buyer. These folks shop for a new home and when asked about their existing home, they tell the bank “we’re going to rent it out.” Since most banks and lenders have new strict guidelines about counting rental income from a new landlord, they will often make the homebuyer qualify for their new loan by including BOTH mortgage payments into the buyer’s debt-to-income calculations.
No problem for the Shop, Swap, and Drop buyers. They CAN qualify to repay both mortgage loans. So they select a nicer home in a nicer neighborhood but with prices far below what they were at the peak of the bubble.
After the new loan closes, they move out of their underwater home, move into their move-up home, and then default on the first home. The dropped house goes into foreclosure and your Shop, Swap, and Drop neighbors throw their credit score under the bus for a while. But they figure the gamble is worth it if they can get rid of a house with serious negative equity that they can’t rent for enough to cover the payment.
It will be interesting to see if this becomes more widespread. At this point in time, I’m not so sure the masses would be able to qualify with both mortgage payments. Instead, I’m hearing more stories about people who are just unable to pay their mortgage and are waiting it out, sometimes for many, many months before the foreclosure auction happens and they must move out into a rental. I’m hearing that people are living mortgage-payment free for up to a year before the bank gets around to their auction.