The decision to refrain from making a mortgage payment is a big one. For many of our clients, there are steps to be taken months before undertaking a strategic default. There are also major considerations such as credit impact. Getting your financial “house” in order in anticipation of a strategic default may increase the likelihood of achieving the best outcome. Before undertaking strategic default, it’s important that you speak with a competent foreclosure defense attorney who can explain the legal consequences and possible outcomes as they relate to your unique financial situation.
Ben Hillard, a former banker turned lawyer, helps homeowners understand if or when strategic default should be a part of their strategy when pursuing loan modification, deed-in-lieu, short sale or foreclosure. He explains the pros, cons, and statistics associated with particular outcomes so that you go into the process with an arsenal of information. Most importantly, he draws on his unique mortgage banking background to develop a strategy tailored to your unique financial situation.
Look Realistically at Your Situation
Ben defines strategic default as “the decision to refrain from making mortgage payments despite the present ability to make the payments because future default appears inevitable” because this is the reality for most of Castle Law Group’s clients. Here’s an example scenario:
Jim, a new retiree, has a $2,000.00 mortgage payment (inclusive of taxes and insurance) and other monthly expenses of $1,200 per month. Having retired, Jim is now on a fixed income of $2,500.00 per month of social security and has $75,000 in savings. To meet his monthly obligation, he must dip into his savings – the very funds securing his retirement. Clearly, if Jim continues down this path, he will run out of money in a few short years. If his house wasn’t $100,000.00 upside down, he could simply sell the property and downsize. But being “stuck,” Jim is facing default within a decade – at which point he stands to lose his home and have no savings to fall back on. For Jim, being upside-down is a present financial hardship with a detrimental future consequence.
One could argue that Jim could continue to make his mortgage payments if he stopped paying his other monthly expenses. However, this is unrealistic. Ben Hillard believes, with the exception of a handful of hardship cases, that nearly every default is strategic.
Further, simply being upside-down is a financial hardship. Prior to the real estate bubble, if someone struggled financially, he or she simply sold the property, put the equity in his or her pocket, and paid off the loan. Today, for many Floridians, this is not possible, and such a condition is a financial hardship. Stated another way, would someone default if they had equity?
Chances are you didn’t get here alone. Ben explains the lender’s role in creating the real estate bubble that put millions of Florida homeowners in this upside-down position. Learn more about how banks caused the real estate bubble.
Fight Deficiency Judgment
The goals of a strategic default is to either secure a loan modification or get out from under an upside-down property while avoiding a deficiency judgment (or having to pay the balance of the loan after the home has been foreclosed, deeded or sold). Ben argues that the lenders played a large role in the homeowners’ upside-down situation and why the homeowner shouldn’t have to bear the burden alone. The result is a boast-worthy success rate of homeowners avoiding a deficiency judgment.
Why Choose Castle Law Group
With his mortgage banking background, Ben may be the best-positioned lawyer in the state of Florida to render advice concerning strategic default. In his prior banking career, Ben oversaw thousands of foreclosure suits and conducted loan purchase due diligence on billions of dollars of loan acquisition transactions for Ocwen, Countrywide, Wells Fargo, and Lehman Brothers. Other reasons to choose Castle Law Group.
Frequently Asked Questions
What is a strategic default?
The best definition of a strategic default is: the decision by a borrower to stop making payments, despite having the present financial ability to make the payments, because future default appears to be inevitable.
What is a strategic foreclosure?
Strategic foreclosure is a strategic default that results in a foreclosure suit – which happens more often than not. In some cases, the lender refuses to undertake a workout option other than foreclosure. However, many of Castle Law Group’s clients achieve a short sale or deed-in-lieu of foreclosure part-way through a foreclosure suit. All four options – short sale, loan modification, deed-in-lieu and foreclosure – can be pursued as workout options following strategic default and are not mutually exclusive. In all, the primary litigation goal is either to get the lender to agree to “waive the deficiency” or refrain from seeking a deficiency judgment, or to achieve a loan modification; and the necessary leverage is frequently derived from aggressively defending a foreclosure suit.
How do you strategically default on a mortgage?
The short answer is that you simply stop paying your mortgage. But, as mentioned above, the decision to default on your mortgage is a big one and you should seek the advice of a competent foreclosure defense attorney before making that leap. For many of our clients, getting their financial house in order prior to defaulting is the critical first step. Ben Hillard can help you determine if or when strategic default is right for you and explain the possible outcomes as they relate to your unique financial situation.
What are the benefits of strategic default?
The primary benefit of strategic default is taking a step towards resolving an upside-down loan(s), and with the right strategy, likely avoiding deficiency judgment or securing a loan modification. Homeowners rarely accomplish either, absent a strategic default. Other advantages include:
- Increasing your short term cash flow. Not only are you not making your mortgage payments; depending on your goal, you may also refrain from paying real estate taxes and hazard insurance.
- Flexibility to move, downsize, upsize, or take that job in another state
- Working toward your retirement goals. Strategic default can be the first step in getting out from under an upside-down property that’s draining your savings. It can also allow you to push money into retirement accounts.
- Without defaulting, the lenders rarely help you.
How to complete a strategic default?
The short answer again, is to simply stop paying your mortgage. But, there may be steps to undertake before doing so. A competent foreclosure defense attorney can help you determine if and when strategic default is right for you and explain the possible outcomes as they relate to your unique financial situation.
The end result of a strategic default is a loan modification, short sale, deed-in-lieu or foreclosure. Remember, these are not mutually exclusive. A short sale or loan modification may occur a year or two into a foreclosure suit.
What happens when you default on a mortgage?
The most important result: the lender becomes more willing to work with you. That’s because the lender becomes uncertain about the collectability of the account and begins to “feel the pain” financially.
As early as three months after the first missed payment, the lender typically files a foreclosure suit. However, in this market, five or six months is more common. However, we’ve seen clients go more than two years before the lender even files a foreclosure suit. We’ve also seen many lenders refrain from filing a foreclosure suit where there is an active short sale, or a loan modification application pending.
You typically have 20-days from the date you are “served” with a foreclosure suit to respond to the same. The time to respond is specified in the “Summons.” “Served”, typically means that someone shows up at your door and hands you a copy of the foreclosure complaint. Some laymen refer to foreclosure complaints as a “lis pendens” or “foreclosure notice”. During this 20-day window, it’s critical that you find a competent foreclosure defense attorney and file a response with the clerk of court. If you do not provide a timely response, the lender can ask for a clerk’s default. Absent some very specific circumstances, if you were properly served and are defaulted for failure to respond, you may lose your right to defend or otherwise challenge the lawsuit. The lawsuit then proceeds at the lender’s pace and discretion. There may still be an opportunity for resolution, but you’ve lost your opportunity to gain legal leverage toward the accomplishment of a particular outcome. There may also be technical legal grounds to set aside a default – the most common of which is where the parties enter into settlement discussions where the lender agrees not to proceed with the foreclosure during the settlement negotiations. This can be very complex and should be undertaken with the representation of a good attorney.
What are the negative consequences to strategic default?
The first and foremost consequence is that you risk losing your property. The next certain consequence is serious negative credit impact. While your credit score depends on a number of inter-related factors and the impact varies by individual, the majority of our clients see credit scores rapidly decline within the first one to four months of non-payment and then gradually decline thereafter. For the vast majority, a strategic default on a first mortgage, or a first and second mortgage on your primary residence may reduce a 750 credit score to 620 in a few months.
For borrowers that carry high credit card balances, the significant decline in the credit score often triggers credit card lenders to increase your interest rates, and/or to reduce borrowing limits down to the present balance on the account. Additionally, there are other potential credit issues that should be discussed within the confines of a consultation with a lawyer, in the context of your particular circumstances.
Another consequence of strategic default is frequent calls from the “lender gnomes.” How to handle these calls depends upon your particular goal, where you are in process, and other factors.
One of the most challenging consequences is the impact on your ability to finance another home. Once the loan is resolved (by modification, debt forgiveness or final judgment without debt forgiveness), many lenders will not make a home loan to a borrower until 2 years after a short sale and 3 years following a foreclosure. However, these time periods are at the lender’s discretion and change often.
Still, strategic default is often a necessary first step in getting out from under an upside-down mortgage and getting the lender to work with you. It’s important to recognize that you may end up in a foreclosure suit and need legal counsel help you form and implement a strategy. Aggressively defending your foreclosure suit is the best way to gain leverage to accomplish your goals.