RealtyTrac has dubbed 2011 the year of Strategic Default (along with the year of foreclosure litigatioin, failing foreclosure lawfirms and shadow invenory). For this blog, I'm going to narrow my thoughts on Strategic Defaults.
On a recent visit to California, I sat across the table from a dear friend who shared his agonizing struggle about what to do with his severly upside-down home mortgage. "I couldn't have ever imagined this would have happened to us", he managed to choke out. This was coming from an an honest father, husband, and businessman, with a great reputation in his community.
Life often throws some rather difficult circumstances our way, forcing us to make equally difficult decisions; like the decision facing my friend. So what is a 'strategic default' anyway? In a nut shell, it is a borrower's decision to stop making payments on a debt, usually despite having the financial ability to do so. In other cases, the borrower may be experiencing problems due to loss of employment, a change in marital status or a decline in earnings, and is simply not able keep up with the mortgage payments or qualify for foreclosure assistance.
Unlike a foreclosure where the lender makes the decision to take the property back, a strategic default is intentional, planned, deliberate, and as the name implies, a tatical/strategic move by the borrower.
There exists a rather heated debate within the real estate and financial community as to the moral, fianancial, and ethical implications of a stragtegic default. Some suggest borrowers simply seek refinancing options. Others hold fast to the conviction that mortgage obligations must be met, negative equity or not. While others applaud strategic defaults as a way to protect the financial interests of the borrower.
The questions must then be asked... Is strategic default ethical? Should an borrower plan to default on their mortgage? What if it might be possible to find the resources to handle the mortgage debt? Should it be considered as a way to avoid unexpected or even anticiapted foreclosure? Is foreclosure assistance a worthwhile alternative to a strategic default?
In my California friend's scenario, he stopped paying his mortgage four months ago, following failed attempts at refinancing and a loan modification. The main reason for his need was that the amount owed on the property is significantly greater than the actual market value of the property (by well over $200K). By walking away, he would still be losing the large down payment he placed on the house, plus the painful hit to his credit. In light of his specific situation, I advised he consider a short sale as his best option.
Since California is a non-recourse state, my friend could technically pursue a strategic default without worry of recourse from the lender. It is IMPORTANT to determine whether you are in a Recourse or Non-Recourse state, and what your state's laws will allow the lender to do with unfulfilled mortgages.
Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statues do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property). Consult an attorney and/or CPA for your specific advice on your situation.
Anti-Deficiency / Non-Recourse States
Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington
As a Certified Distressed Property Expert, I help troubled homeowners to work through every aspect of the difficulty that accompanies a mortgage which is no longer manageable, possibly facing foreclosure, and move them toward financial solvency.
If you or someone you care about is ready to tip the scales back toward financial health, contact Realtor Ruben Vera today and let's discuss your particular situation. Email me at only1ruben@hotmail.com, or call me directly at 757-581-9058.
For immediate FREE online resources, go to HelpForHamptonRoads.com.
Disclaimer: As I am not neither a CPA, nor an attorney, reader should consult said professionals for specific advice.
