This is not a new issue. This has been a growing concern among borrowers. There is a dawning realization that if a property cannot pay off the mortgage loan balance in full then the borrower will be responsible for the shortage. We talked about deficiency debt in our March 2010 post entitled Plan To Be Followed When You Walk Away From Debt. As predicted, there has been an increase in lawsuits for deficiency judgments.
This current post focuses on principles and strategies that can be a guide towards resolving deficiency debt.
A deficiency debtarises when a property sold at a foreclosure auction cannot generate enough proceeds to pay off the entire loan amount. If a lender can prove to a court that a borrower is personally responsible for the payment of a deficiency debt then the lender can obtain a deficiency judgment against a borrower. A deficiency judgment is a court order that directs a debtor to pay the lender a certain amount of money. A deficiency judgment includes the principle balance, unpaid interest, legal fees, escrows, and/other costs. A deficiency judgment allows the lender to collect interest until the balance is paid in full. It provides a lender with various tools to collect the judgment such as the right to garnish wages, the right to place a hold on a bank account, and the right to place a lien on personal property or real estate. A deficiency judgment can appear on a credit report. If you are not clear about deficiency debt please read the articleWhat Everyone Should Now About Debt Forgiveness, Obligations, and Deficiency.
There are three alternatives that can arise from the auction of a property at a foreclosure sale:
The property is sold to the highest bidder or,
The lender takes the property in full satisfaction of the debt or,
The borrower redeems the property by paying in full at auction.
If a lender takes the property at an auction then there is no deficiency debt arising from the loan made by the lender. If the lender decides to take a cash bid at an auction, instead of the property, then the borrower may be responsible for the difference between the total amount due on the loan and the amount collected from the cash bid.
Keep in mind that an auction may not always eliminate a second mortgage and/or Home Equity Line of Credit ("HELOC"). A foreclosure auction typically deals with the loan that is the subject of the foreclosure lawsuit. A foreclosure lawsuit is usually started by the first lien mortgage lender. A borrower can still remain liable for a second mortgage and/or HELOC after the first lien mortgage lender takes the property at an auction.
Each state has specific laws governing the collection of a deficiency debt. In some cases, states prohibit the creditor from seeking more than the collateral used to secure the loan. This is called “non-recourse” or “anti-deficiency.” This means that a creditor cannot hold the borrower personally liable for more than the value of the property at the time of sale. In a “recourse” jurisdiction such as Ohio, if a borrower owes a lender an $100,000 deficiency after a foreclosure sale, then the lender can sue the borrower for the difference, i.e., get a deficiency judgment against a borrower. You can learn more by readingWhat Is The Difference Between Non-Recourse and Recourse States.
TheWSJarticle contained important points which should serve to remind all strategic defaulters about the need to develop awritten action plan. The following are the main points from the article:
We bought a house in TX two years ago, and were planning to stay for a while. Unfortunately, that didn't happen. I got a job in Iowa, so we are trying to sell our house in TX. We can still afford the mortgage payments right now because of my wife's job, but her job is contract based and her contract is up in September with no guarantee of a renewal. If we sell, we are looking at having to come up with at least $20,000 to bring to the table, which would wipe out all of our savings. We bought for $145,000 and are trying to sell for $125,000. We are planning on talking with the bank (Chase), but we don't want to make any mistakes with them that will come back to bite us later. Any advice you can give us?
JK
GET ANSWERS…
Dear JK:
Thank you for your question.
Did you know that Chase offers homeowners a cash incentive to successfully complete a short sale? Chase will pay a homeowner up to $30,000 if the homeowner can successfully perform a short sale on their property. If you type in the following search term into google you can get more information: “chase short sale incentive”.
I recently ordered and read your book and I have a few questions particular to my situation. I hired a loan modification company about six months before I ran out of credit to juggle, in order to make my mortgage payments. The loan modification company has done a good job working for me and they are not what this email is about, I just mention it to explain my current circumstances. I now have not made a payment for almost a year. The loan modification company has been consistently working with the bank's loss mitigation department, which is why the bank has not begun the foreclosure process. It's been the bank's lack of action to come forward with a loan mod offer that has taken so long.
Then in May of this year I worked with a guy who's house in Reno has lost over half of it's value since his purchase in 2006. He used to be an accountant and had been reading about the derivative and MERS mess with mortgages. He was very angry in the fact that the banks had sold off loans once to Wall Street, continued to collect mortgage payments after the derivatives had crashed and then received bail outs from us tax payers on top of it. Now his house is worth less than half of what he paid all because of the bubble the banks and politicians created.
In December of 2009 he saw an article in the paper about a Law Firm in Reno who was helping homeowners fight back against the banks. He hired the Law Firm who immediately had him stop making his mortgage payments. Over a year later they finally went to court with the bank, who at the hearing could not show that they either owned the Note or who was the actual owner of the Note for which they were servicing the loan. The Judge stopped the hearing until the bank could prove that they had the legal right to collect or foreclose on the house. He and his family are still living in the house today, rent free, and saving their mortgage payments in case some day someone does come forward with the note.
I explained my underwater and default situation to him and he told me to just start searching online and get educated on all that has gone on with the banks, derivatives and MERS. Since I bought my home in early 2007 my mortgage was probably also securitized and sold off.
In my research I came across your website and ordered your book on Strategic Default. Through your advice as well as many other web sites on the subject, I decided to send off a RESPA letter. I added to my request that if Bank of America claimed to still own the Note on my house that I would like to set up a viewing of the original 'wet ink' Note for verification. This concept came from a few sites, in particular www.consumerdefenseprograms.com.
While Bank of America did respond and sent copies of all of the original documents of which I already had copies, their response to the viewing of the original note was, "You cite no legal authority that supports your claim that you are entitled to view the original Note, and we are not aware of the existence of any such authority. Accordingly, Bank of America, N.A. respectfully declines this request. If you wish to pursue this matter further, please provide such legal authority."
Do you have any advice in this situation?
Is "Show me the Note" something you recommend pursuing?
If so, what is the best way to find a lawyer in Washington State to assist me in this pursuit?
In our last post in our Planning For A Strategic Default Series we wrote about the importance of Developing an Action Plan before initiating a strategic default. We are now going to focus on preparing an income and expense form and gathering documents. These are steps 2 and 3 respectively of Chapter 8 from our guide book Strategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. Chapter 8 provides an introductory step-by-step guide on how to successfully initiate and complete a strategic default.
If you are like most strategic defaulters, in addition to owning underwater property, you possess other types of debt such as school loans, business loans, credit cards, and home equity lines of credit.
Remember. The primary objectives of a strategic default are cash flow protection, savings preservation, and wealth protection. So putting together a financial worksheet and keeping proper records is an important step towards your objectives. All of these objectives point to one inescapable conclusion. Your ultimate objective is to be in a better financial position by the end of a strategic default.
It is very important to understand the difference between judicial foreclosures and non-judicial foreclosures. In simple terms, a judicial foreclosure requires a proceeding in a court. A non-judicial foreclosure does not require any proceeding in a court. In each type of procedure, a lender has the right to auction a property if the lender has properly filed all of the necessary paperwork. Let’s review important aspects of each.
The following are the 3 "Must Send" Debt Defense letters. This means that at all times you must send any of these letters to any debt collection company or the original lender that contacts you.
Part of our job at strategicdefault.org is to review other viewpoints about strategic default. This current post is inspired by another post we found while researching the universe of articles on strategic defaults and foreclosures.
This question was posed by a reader of JLP's blog. The question and answer are as follows:
"I bought my condo at precisely the wrong time. I didn’t, however, listen to everyone telling me I could afford to buy more. I did a straight 30 year fixed that I could afford in reality. Of course I am incredibly underwater on my mortgage now. It is depressing, needless to say, and even more so when I feel as if my taxes are helping people who didn’t “do things the right way” and some companies who seemed to have contributed greatly to the problem and are not being held responsible...I live in Illinois, western burbs of Chicago...I bought for $139,000, now owe $122,000 and the most recent sale was $77,000...30 year, 6.75% (which was good then!) percent...When I bought I planned on staying 5 years or so and moving up (didn’t everyone?). I don’t *need* to move. I sure wish I could buy some of the houses on the market now though! For what I paid? I bring home (after taxes) about $40,000 a year. My mortgage + PMI + escrow is almost $1,100...I know there are people in much worse shape. If I lost my job this whine about underwater wouldn’t even exist, you know? Still – just the though of paying even MORE out when I feel like I am not getting any benefit is upsetting, depressing."
HappyNewYear. We all made it to 2011. Somehow, someway, to breath another day.
The feeling of change in the beginning of a new year can be used to create a meaningful focus in our lives. For those of you who read our website...Thank You for visiting and taking time to read our content.
We believe that your primary concern is how to strategically default the right way with the least financial and emotional impact. We believe you are seeking solutions to protect yourself, family, cash, savings, and wealth when deciding to not pay a debt.
One thing is for certain in 2011, strategic defaults will continue to rise. Thus the demand (and need!) for solid, reliable, and actionable information will continue to be strong.
We will be coming out with a new look and feel for our website. It will be easier to access our content based on categories and interest. We will be adding a strategic default calculator, forms, and other tools to better help you with a strategic default. We will continue to provide detailed steps for an effective strategic default. We will be adding a forum for our readers to share their experiences. Our goal is to continue to provide the best and free strategic default resource on the planet.
We are predicting that the key issues for strategic default this year will be:
This is a long post but it is worth the time to read everything.
This post is based on a story written in The Home Equity Theft Reporter. The Home Equity Theft Reporter is a must read for people seeking to protect their home, cash, and investments from improper debt collection and foreclosure practices.
The Minneapolis Star Tribune reported that a 57 year old woman was arrested while driving home. At first she did not know why. After being placed into a county jail she learned that she was arrested for missing a court date over a lawsuit for an unpaid debt.
Enjoyed your book, but it doesn't address retirees walking away from a home. What assets can a bank pursue if I'm retired & walking away from a home I own in NJ? I've been told retirement money (401K, pension, social security, bank accounts) are Teflon from all except the IRS. Is this accurate? Please clarify.
Thanks
AR
GET ANSWERS...
Dear Ar:
I thank you so much for your gratitude. I have been learning so much from reader's questions.
Your questions is: What Assets Can A Bank Pursue If I’m Retired and Walking Away From A Home?
We recently received a comment from a reader of our new bookStrategic Default: How To Create A Brighter Financial Future For You, Your Family Or Your Business. The reader had asked why we did not address strategic default from a state by state perspective. The reader acknowledged that the book lays a strong foundation in preparation for a strategic default. Perhaps the reader did not understand that each person's situation and perspective is unique. On top of that each state has its own rules and laws which are changing. That said, our reader's question did open our eyes. We now understand that it will help the readers of this blog if we provide concrete steps to successfully execute a strategic default.
Credit reporting agencies are taking serious notice of strategic defaults. The main credit reporting agencies, Equifax, Experian, and Trans Union, have seen a sharp and significant increase in default rates among prime borrowers. The main credit scoring companies, Fair Isaac creator of FICO and VantageScore Solutions creator of the Vantage Score are seeking to account for the change in consumers payment behavior during this current economic crises.
Below is an excerpt from an article published by The Real Deal as it relates to this new attitude by credit reporting company's:
"[i]n late October, both Fair Isaac, the developer of the FICO score that dominates the mortgage field, and VantageScore Solutions, a joint venture by the three national credit bureaus and marketer of the competing VantageScore, outlined modifications they are making to handle the vast credit disruptions caused by the housing bust, the recession, high unemployment and behavioral changes by consumers. Not only are borrowers who previously were rated outstanding credit risks far more likely to default today...but many homeowners are defying long-standing credit industry assumptions by going delinquent on their first mortgage payments while simultaneously continuing to pay their credit card balances and second mortgages on time. Strategic defaults -- walkaways -- by high-score borrowers also have been an unexpected and shocking development."
"To adjust its statistical models to these new realities...VantageScore 2.0...expected to be rolled out nationwide to lenders in January, focuses in on the subtle warning signs of credit stress that might have been missed earlier -- and penalizes or rewards consumers with higher or lower risk scores than they would have received before. New FICO 8 Mortgage Score is based on similarly exhaustive research into consumer credit behavior changes...[w]hen used by a lender to rate the risk of new applicants or existing mortgage customers. The Mortgage Score is likely to be anywhere from 15 percent to 25 percent more accurate in detecting signs of future default compared with the standard FICO model."
In a January 7, 2010 New York Times Article John Courson, the president and CEO of the Mortgage Bankers Association made very critical statements about people walking away from their homes or in other words strategically default. To quote from the article, John Courson:
"told The Wall Street Journal that homeowners who default on their mortgages should think about the 'message' they will send to 'their family and their kids and their friends.' Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarilychoosing not to pay."
It seems that the Mortgage Bankers Association has had trouble following its own "moral directives". And WOW!!! You have to respect Jon Stewart's team from The Daily Show for completely exposing the hypocrisy of the Mortgage Bankers Association in the following video clip:
I would like to do a strategic default, however, I'm concerned that BOA will be allowed to take my daughter's college fund, which is only $17,000, and also pursue me relentlessly for years. Is this true for residents of North Carolina? Our home, which we paid $385,000 for three years ago is now worth $290,000, which is less than we owe. We can just about afford to stay and pay all of our bills but this could change if our income goes down even slightly. Thanks for any advice you can give. RH
In our previous Collection Tactics Monitor: October 6, 2010 post, we talked about a debt collection technique employed by a company called Heritage Pacific Financial. Please read the prior post so you can put this post into context. Since that post, we received the following email:
"Hello, I am writing you on your article http://www.debtdefense101.com/2010/10/collection-tactics-monitor-october-6.html.I am pretty much in the same case than “Kim” except Heritage Pacific took it a step further and filed suit against me. More or less the same Boiler Plate FRAUD complaint. I’m in process of hiring an attorney to respond to this and ask the court to dismiss this case (plus their Statute of Limitation is expired).I wonder if the hundred of people being victimized by this company http://hpdebtexchange.com/ couldn’t unite and counter-sue or get them close down business…Best, PK"
So assuming that PK's email is true then Heritage Pacific believes one or all of the following:
1. It has the right to sue a debtor for fraud when it buy's the debtor's debt from the original lender. In essence, Heritage Pacific believes it can be assigned or "buy" a fraudulent loan.
2. It is entitled to damages for alleged loan fraud involving a mortgage loan that can't be collected under anti-deficiency or non-recourse state laws. Basically a "run-around" anti-deficiency or non-recourse laws since these laws do not apply to fraud.
3. It has the legal right to conduct a "fishing expedition" by suing a debtor for fraud even though Heritage has no basis or proof. Why? because Heritage did not originate or loan the money, so there is no way Heritage could know if in fact "Kim" or "PK" committed fraud. In fact, Heritage does not seem to have a basis to allege fraud.
4. It can harass a debtor with a lawsuit so that the debtor would agree to settle instead of the financial and emotional expense involved in hiring an attorney and going to court. On top of that, if in fact, it's true that a debtor lied on his or her loan application then the debtor will have an incentive not to expose themselves to a court proceeding.
Unfortunately, PK has to spend money and time to defend themselves.
Lets focus on the "odds" game Heritage Pacific is playing. It is well known that during the lending craze many people obtained loans with credit and no real proof of income. These loans were called No Income No Asset verification loans. These loans were also called stated loans i.e. the borrower "stated" his or her income without having to submit any proof of income. These loans were also called "liar loans". In any event, there is a strong likelihood that the income "stated" in many of these loans may not be accurate. Why? because the "right" income had to be "stated" to get the loan approved. So who had an incentive to "state" an inaccurate income on a loan application? Is it the borrower or investor who wanted the home? Is it the mortgage broker or loan officer who wanted to earn a broker's fee or commission? Is it the original lender who could sell the loan to a Wall Street investment bank for a tidy profit? Is it a Wall Street investment bank who could make a healthy commission or fee by packaging hundred or thousands of loans into a mortgage backed security? or is it the investors, credit default swaps, traders, insurers, who all made money on securitized instruments backed by mortgage loans?
THIS RAISES A POTENTIAL DEFENSE AGAINST HERITAGE. A BORROWER CAN CLAIM THAT THE LENDER, BROKER, LOAN OFFICER OR ANY OTHER AFFILIATED THIRD PARTY PUT THE INCOME IN THE APPLICATION OR TOLD THE BORROWER WHAT THE INCOME SHOULD BE. FOR IT IS ALSO WELL KNOWN THAT MORTGAGE LOAN APPLICATIONS WERE PREPARED BY THE ORIGINAL LENDER/BROKER AND IT'S REPRESENTATIVES. IT IS ALSO WELL KNOWN THAT ORIGINAL DOCUMENTS PRESENTED TO OR SIGNED BY THE BORROWER MAY NOT BE THE SAME DOCUMENTS IN THE MORTGAGE LOAN FILE. BORROWERS NORMALLY DID NOT COMPLETE THE LENGTHY 1003 UNIFORM RESIDENTIAL LOAN APPLICATION. HOW CAN HERITAGE PRODUCE EVIDENCE ABOUT THE LOAN PROCESS IF IT DID NOT ORIGINATE THE LOAN? ALSO COULDN'T THE BORROWER COUNTER SUE HERITAGE AND THE ORIGINAL LENDER FOR FRAUD? WE SHALL SEE.
There are other issues raised. Heritage Pacific may be a legitimate debt collection company. However does the company employ legitimate debt collection techniques?
If you visit http://hpdebtexchange.com you will find that Heritage Pacific has developed an investment vehicle for people seeking solid returns on their money. It's called "HP Debt Exchange: The smart and simple way to buy and profit from debt". The investment vehicle consists primarily of second lien mortgages or lines of credits. An investor can by into the investment vehicle and share in the income from collecting the debt. The website explains why the company purchases second lien mortgages or lines of credit. The website also points out that it can be profitable for an investor to buy debt. This is no fly-by-night company. In many respects the investment strategy could be a sound business model. The company explains that they have excellent collection techniques such as "offering a discount payoff, forgiving back payments, and modifying terms of the loan." Sounds good, however there is no mention of suing debtors for fraud on loans Heritage purchased not originated. You can review the companies FAQ here.
This is the future of debt collection. Basically purchase a $50,000 2nd lien mortgage for $500 with investors money. Make a deal with the original debtor to pay back $10,000 and forgive the balance of the $50,000. Share the $9,500 profit ($10,000 less $500) with the investor. Thus, debt collection and investing in debt collection is a growing, profitable business. As more and more people decide to strategically default they will become prime targets for debt collectors. Since the debt collectors will have a source of capital from investors seeking to invest in debt collection.
"Debt Is Similar to the Physics Principle of Matter and Energy. There is a principle in physics that matter and energy can neither be created nor destroyed; they can only be rearranged. Debt follows the same lines. Once debt is created it cannot be destroyed unless it is restructured and resolved. This means that a strategic default does not eliminate debt unless you restructure and resolve it. Debt will follow you until it is restructured and resolved. A lender has a certain period of time to collect debt, not unlike a statute of limitations. In certain states a lender has up to 20 years. With certain limitations, a lender or creditor can seek to collect on its debt anytime before a statute of limitations expires."
So no matter what debt defense strategy you decide to employ, if the debt is not restructured (i.e. settlement, reduced payments, etc.) or resolved (i.e. debt is forgiven, statue of limitations, bankruptcy, or inability to collect), then the debt will follow you.
The Heritage Pacific saga will continue. Has Heritage Pacific developed an effective debt collection technique which utilizes a potential fraud lawsuit against a debtor to collect a debt? or is Heritage Financial simply playing the odds by using a "scare tactic" that could not possibly succeed in court and perhaps violate debt collection laws? Only time will tell.
In the meantime do not become complacent. Heritage Pacific is not the only debt collector in town. Be assured that debt collection tactics will become more aggressive as new techniques appear and AS MORE INVESTOR MONEY POURS IN.
Remember why you are reading this blog. Never forget to use every legally available debt defensive strategy that exists. It is your right. It is your duty.
First. Let's talk about the WHY for this book. The book is inspired by all of our readers questions and comments. It is inspired by everything I have learned about the strategic default process.
The purpose of the book is to give you a solid footing when deciding to walk away from a debt. You can compare this book to a foundation of a house. The purpose of a foundation is to carry the full weight, the full load of the home placed on it. We all understand that a home needs to be built upon a proper foundation in order for it to last.
You need a proper foundation to strategically default. The decision to strategically default requires a complete understanding of the process. You need to reach your goals with a strategic default. You need to understand the risks. By understanding your objectives and risks of a strategic default, you will eliminate fear and instill confidence. You will be successful.
The primary goals of a strategic default are:
Cash Flow Protection
Savings Preservation
Wealth Protection
The primary risks of a strategic default are:
Deficiency debt leading to a deficiency judgment.
Lower credit score.
Loss of the home or property to a foreclosure sale.
Fannie Mae action or government actions against strategic default.
Debt collections tactics, including mail, letters, personal visits to the property, phone calls to cell phone, work, and/or family members.
The purpose of the book, Strategic Default: How To Create A Brighter Financial Future For You, Your Family, or Your Business is to help you reach your primary goals and to help you reduce or eliminate the primary risks. It is to instill confidence and certainty. In this way, you can execute a strategic default to best fit your circumstances. This book will help you realize the primary goals of strategic default.
The book contains a step-by-step strategic default checklist. This "must follow" strategic default checklist helps you successfully put a strategic default into action.
We must all make the first step. We must put our best foot forward. When it comes to strategic default, the results are not immediate. There is an important principle asserted in the book. The eighth principle from the chapter, Eleven Principles of Strategic Default is:
8. A Strategic Default Is Measured in Years, Not Days or Months
Any decision to walk away from debt begins a long process. The process can last years. It can take a lender or creditor a year or more to foreclose on a property. It can take you three to four years to repair your credit. It can take a year or more to pay back a debt.
It can take a lender or creditor a year or more to win a court action to collect money. You can live in your property, payment free, for a year or more before a lender can successfully foreclose. It can take a year or more before you regain your personal and financial confidence. A lender or creditor can spend a year or more trying to collect a debt through a long process involving letters, phone calls, and/or legal action.
The point of this principle is to show you that a strategic default takes time. It's one thing to implement a strategic default i.e. stop debt payments. It's another thing to live through the process after you stop making payments. The book is a helpful guide while you live through the strategic default process and its ensuing consequences.
First off, your website is great, thanks for all the information you've posted. I know you cannot take the place of paid legal advise but I was hoping to get your opinion on my situation.
My wife and I currently live and own a home in Oregon. It's small and we are ready to move on. We owe about what the house is worth so selling it has not worked. Due to our income and low debt we have qualified for a home loan on another house and plan to buy it and move there.
We would rent out our current house, and if we run into any financial trouble, just stop making payments on the rental and focus on keeping our new primary residence. Since Oregon is a non-recourse state, the lender should not be able to come after our assets or primary residence for not paying the rental house mortgage correct?
Get Answer: The issue of non-recourse/anti deficiency is an important one. Keep this in mind: even if Oregon is a non-recourse state, you need to now how Oregon implements its rules. It may not be an absolute, blanket ban against the collection of a deficiency debt by a lender. Please check this link to learn more about Oregon's deficiency laws : https://www.oregonlaws.org/ors/86.770. So yes...please consult with a qualified attorney in your area.
What if we refinance the soon to be rental house to get a better interest rate?
Get Answer: That would lower your payment and perhaps make it profitable to rent the house. Even with no current equity. Yet you are not totally upside down.
I was told that if you refinance, your loan becomes full recourse, regardless of what state you are in, is this true?
Get Answer: It may be true. Generally, if a loan was not used to purchase the house then there may not be any protection under relevant non-recourse/anti-deficiency laws. So please consult with a qualified attorney.
If we want to keep and rent this house long term, a refinance makes the best financial sense, but I don't want to take away the option of a strategic default by refinancing into a full recourse loan. An extra $100 in interest payments per month seem worth the cost to keep all options open.
What is your opinion on this?
Get Answer: Well said. Essentially the $100 monthly cost is your insurance payment for staying protected under Oregon's anti-deficiency laws. Yet, if you refinance the loan you may earn income. Furthermore, if you refinance into a fixed rate mortgage then over time the principle balance will be lowered. You may gain equity if property prices have stabilized in your area. However it may not be likely. Keep in mind that if the foreclosure sale of your property satisfies the lender in full then there is no deficiency. Also any difference owed to the lender may be settled for less than what is due or it may be forgiven. Forgiven debt may be considered taxable income. However, under current Federal law forgiven debt may not be taxable if it involves a primary residence. Focus on acquiring the other property as soon as you can. Spend more time considering your strategic default alternative. Please read this link to learn more about debt obligations and deficiency. Also speak with a qualified professional to round out your thinking.
Thanks
JA
Thank you for reaching out.
---- Below Is JA's Response To Get Answers...----
Thanks for your response, that was helpful.
I've done a little more research on Oregon's anti deficiency laws and it seems its not as clear for us as recourse vs. non-recourse state like I first thought.
This is what I understand from reading the statutes:
If a non-judicial foreclosure is an option under your loan contract (if a power of sale agreement was signed as part of your loan, which is likely) in Oregon, then the bank can go this route seize your house and sell it with proper notice. They are not allowed to come after you for any debt deficiency resulting from the sell of your house in a non-judicial foreclosure.
If there is no power of sale agreement, or if the bank simply chooses to go this route, they can choose a judicial foreclosure. This will result in a public auction of your house and a deficieny judgement against you for the difference in what the bank gets and what you owe. Because this option is more time consuming for the bank, it is less likely, unless you are significantly under water and the bank thinks you have enough resources to make a deficiency judgement worth thier effort. Luckily for us right now we owe about as much as the house is worth so the bank most likely would not pursue this option. If housing prices continue to fall that might not be the case.
So it turns out the walk away options is less do-able then I had hoped. Especially because the mortgage debt tax foregiveness only applies to primary residences, not rentals. For now it looks like we will proceed with buying the new house, renting out the first house and hoping that property values stabilize or rise. If not, we'll have to think a little bit more about the consequences of a strategic default.
An article like the following cannot go unnoticed, unread, and un-commented upon. MSNBC.com reports on Homeowners Feeling The Pressure From A Life 'Underwater'. The article talks about a homeowner who is "doing what millions of Americans are doing these days: He's getting used to living life 'underwater' - the real estate industry's term for a property worth less than the outstanding mortgage on it".
From the perspective of any person considering a strategic default, there are two main points in the article to consider:
1. The homeowner interviewed in the article has a good job and can afford to make payments, however he cannot tap into any equity. He purchased the property with 100% financing. On top of that he is illegible for a loan modification because he makes to much money. My thought: Why not provide a principle reduction to home owner's willing to make mortgage payments on an upside down property.
2. The homeowner admits to being tied down to the property. However he moved into the basement to rent the two bedrooms in his home. His goal is to use the extra money to reduce the principle balance of the mortgage. My thought: This homeowner has found a creative way to regain equity so he can become "untied" from the property. He is also preserving his good credit in hopes of getting a loan or refinance in the future.The only questions are: can he create equity faster than the current decline of property prices? and will good credit matter if he does not have cash for a down payment or if lenders continue to restrict lending? Only time will tell.
Now, of course, this is old news. Businesses have always used a strategic default when it is in its best financial interest. Businesses generally do not have moral constraints. Yet, this recent article establishes that strategic default is growing simply because assets (in this case real estate) are worth less than the debt secured by the asset. Most importantly, the article illustrates why homeowners and small real estate investors should seriously consider strategic default.
The article begins "Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans."
My thought: One should not overlook this comparison by a major business publication.
"Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as 'jingle mail.' These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense."
My thought. It should be understood that lenders handle strategic defaults on commercial loans differently from residential loans. In other words, a strategic default on a commercial loan has a better chance of forcing a lender to make a deal than a residential loan. At the end of the day the decision is purely financial. It is more likely a lender will collect from a commercial loan modification than a residential loan modification. That being said one cannot ignore the hypocrisy of it all. Several weeks priorFannie Mae announced that it would punish homeownerswho strategically default. In fact, our government has been seeking do the same thing. WHY DON'T THEY PUNISH COMMERCIAL PROPERTY OWNERS.
"These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about 'strategic defaults' when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is 'underwater' meaning its value has fallen to a level less than its debt. Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer. But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments."
My thought: This represents a turning point in the argument against home owner's strategically default. No matter how one reads the prior quote from the article there is one inescapable conclusion. It will no longer be possible to separate the accepted practice of strategic defaults by big business, commercial investors, and our government from strategic defaults employed by consumers. Therefore, it is unlikely Fannie Mae's attempt to punish strategic defaulters will work. It is unlikely that any rule, regulation, or law to limit or prohibit a strategic default by a citizen will ever be effective and most importantly, it is unlikely an such rule or law will ever be legal.
For those who are considering a strategic default. Rest assured that if a strategic default makes sense, you will always be on solid footing.
There has been some interesting news as of late. Our current updates point to changing attitudes about strategic default. It reinforces Why Strategic Default Makes Sense For Individuals and it lets us know that strategic default will be considered by many more people as time goes on. Please read on...
The best part of this article is that it completely speaks for itself. It requires no commentary. I have put the relevant points of the article in italics and quotations.
"Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans"
"Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away...[t]hese companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense."
"These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about "strategic defaults...Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default."
"But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments."
Watch this video to learn more:
Enough said...
In an article entitledThe Ethics of Strategic Default by Mark Miller, the writer refers to a "moral outrage" regarding strategic default. While acknowledging a strategic default can be a good business decision, he points to individual anger about strategic defaulters. The article is a review of past research papers on the strategic default phenomenon. The writer asked an executive vice president of the American Bankers Association if a strategic default constitutes a moral or ethical breach. The answer:
"He argued that banks want to help homeowners find alternatives to default, and stressed the importance of talking to lenders first, citing the all-but-certain hit to credit ratings, and the possibility that a bank will come after a defaulting borrower's other assets. But he stopped short of calling a mortgage a moral obligation. 'It's a strategic decision to back out of an obligation, but the world has changed. Would they like someone else to take on the paper loss that they have? Do people do things like that? Obviously they do."
It is not clear what was meant by "would they like someone else to take on the paper loss that they have", especially since the American Banking Associations represented large lenders that were all to happy to allow TAXPAYERS TO TAKE ON THE PAPER LOSS OF BIG BANKS THROUGH BAILOUTS, TARP, AND OTHER TAXPAYER FUNDED HANDOUTS.
At the end of the day, even the executive vice president of American Banking Association admitted that there is no moral or ethical obligation regarding a strategic default. In his own words a strategic default is "a strategic decision to back out of an obligation."
Anyway...Enough said...
The blog,Naked Capitalism, recently published it'sStrategic Default Awareness Check. Essentially the author went to Google Trends and put in the search term strategic default. It was concluded that the search termstrategic defaultis a "new subject of interest".
So...we took a look at Google Trends. After typing in the search termstrategic default,it appears (based on the data) that significant interest in the topic began around December 2009 and it has continued to remain an important search term. Prior to December 2009, the only timestrategic defaultshowed up on the charts was in September 2009. All other times thestrategic defaultsearch term was non existent.
What does this mean? It means that strategic default has become an important research topic this year. We predict that it will continue to grow in importance as time goes on.
