It appears that banks have decided to strategically default by walking away from a property. Homeowners need to understand the potential risks when a bank decides to abandon foreclosure proceedings against a property. We routinely discuss the primary risks of a strategic default. The primary risks of a strategic default are:
Deficiency debt can lead to a deficiency judgment.
A property can be lost in a foreclosure action.
Lower credit score.
Exposure to aggressive debt collection tactics.
Personal liability for unpaid taxes, utilities, or other property related expenses.
Government action against homeowners that strategically default. For example Fannie Mae may not allow home loans to individuals who strategically default. Recently it was reported that the Federal Housing Finance Agency ("FHFA") intends to aggressively go after individuals who strategically default on a government insured home loan. However a FHFA official released a statement claiming that it will not be the policy to seek out people who strategically default. The bottom line: The government has its eye out on strategic defaulters.
We have posted a few excerpts from an informative article about homeowner's facing personal financial risks for unpaid taxes, utilities, and/or other property related expenses and/or fines. The article entitled: Zombie foreclosures terrorize ex-homeowners is a story about "thousands of homeowners [who] are finding themselves legally liable for houses they didn't know they still owned after banks decided it wasn't worth their while to complete foreclosures on them. With impunity, banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed." Theses owners "have had their wages garnished, their credit destroyed and their tax refunds seized. They've opened their mail to find bills for back taxes, graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping. At their front doors they've encountered bailiffs brandishing summonses to appear in court. [i]n some cities, people with zombie titles can be sentenced to probation - with the threat of jail if they don't bring their houses into compliance." Keep in mind that the lender's motivation is strictly financial. The lender received financial benefits for not completing a foreclosure proceeding. "By walking away, banks can at least reap the insurance, tax and accounting benefits from documenting the loss — without having to take on any of the costs and responsibilities of ownership, according to a 2010 Federal Reserve paper. A walk-away also enables them to 'sell the unpaid debt to debt collectors, sometimes noting to the court that the loan has been charged off,'" Read More at CSMonitor.com Also Read When Banks Walk Away Homeowners Don't Always Win
GOT QUESTIONS? Hi, I bought my current home in August, 2001. I have made each and every payment on-time the entire time I have owned the home. I have exceptional credit (850 FICO). I have tried to sell the home 3 times. At present, it is listed for sale. I have it listed $7,000 below what I owe on the mortgage and I have no takers. Sadly, it backs to a busy road and has a small backyard. However, it is well taken care of -- almost new -- and considerably upgraded. I just can't seem to sell it. I don't even think I could get someone to buy it even at $200K. And now, it looks like Romney is going to win the election and repeal the mortgage interest deduction. I currently take $35,000 in deductions just in mortgage interest alone. Even with his so-called cuts, it will be a huge tax increase for me. I can't afford it. I'm already supporting my parents and my brother who is currently out of work. I would like to strategically default on the property, but I don't know if that is the best option. What would be your advice? I think I am too far off the mark for a short sale since I don't think it would sell even at $200K. It is sad because the home is in a very nice affluent community where the average incomes are over $100,000 annually. And, I don't think the bank is going to work with me at all in taking back a property that is clearly worth much less than I owe on it. I feel I got the short end of the stick and that it isn't going to get any better unless I do something. Even trying to sell it at a loss, I'd be clearing my 401K to do so and no one will step up and buy it. What do you think? Is strategic default the right option for me? Kind regards, JSW GET ANSWERS... Thank you for your question. Let’s think this through by first reviewing all of your available options. After we review your available options we will list key principles for you to consider as part of your strategical default. Short Sale: First things first, do not assume that your lender will reject a short sale offer. Moreover, you may not need to default in order to qualify for a short sale. Please contact your lender to determine if the lender will allow you to move forward with a short sale without a default. The lender will determine if your current hardship qualifies for a short sale without default. If your lender requires your mortgage to be in default in order to qualify for a short sale then you must default in order to start the process. A short sale takes time. It can take as long as twelve (12) months. You must list your property for sale with a qualified real estate broker who truly understands the short sale process and who has experience negotiating short sales. We recommend that you work with a broker that has successfully completed three (3) short sale transactions in the past two (2) years. If your lender agrees to accept less than what is owed via a short sale then a deficiency debt will arise. This is the difference between the total amount due and the short sale amount. A lender can choose to forgive the deficiency debt or can choose, if allowed by law, to sue you for the deficiency debt. If the lender agrees to forgive the deficiency debt then the IRS and/or your state taxing authority may consider the forgiveness of the deficiency debt as taxable income. Currently, the Mortgage Debt Forgiveness Relief Act (“MDFRA”) offers federal tax relief for the forgiveness of debt. If you qualify for under the terms of the MDRFA then you will not have any federal tax obligation for the forgiven debt. The MDRFA is set to expire on December 31, 2012 unless extended by congress. If your lender does not agree to forgive the deficiency debt then you may be personally liable for the deficiency debt. Certain states have anti-deficiency laws. An anti-deficiency law prevents a lender from collecting a deficiency debt from a homeowner. You need to review your state laws to determine if your lender has the legal right to hold you personally liable for a deficiency debt. Please read our article about the difference between non-recourse and recourse states to learn more about anti-deficiency states.
In this article we will explore how to properly analyze a strategic default in connection with any potential tax liability. This is the first article in our new series: Strategic Default Best Practices.
Many homeowners who have strategically defaulted now recognize it can several years for a lender to collect a debt or to foreclose on a property. In fact, many homeowners continue to live in and/or rent their property while strategically defaulting.
It stands to reason that a homeowner who strategically defaults intends to be in a better financial position. The homeowner has not made mortgage payments for several years while living in and/or while renting part or all their property. What a paradox? By not making mortgage payments a homeowner can potentially improve their financial profile. In fact a properly implemented strategic default can create a better financial future for you, your family, or your business. Keep in mind that maintaining a good credit score is not possible when implementing a strategic default. Thus a “credit score" is not an important financial consideration during a strategic default. The primary goals of a strategic default are to protect and increase cash flow, to protect and increase savings, and to protect and preserve wealth/assets; all with the aim of reducing or eliminating the total debt and/or any tax.
There is no free ride when it comes to not paying a debt. In our book, Strategic Default: How To Create A Better Financial Future for You, Your Family, or Your Business we outlined the principle "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. Therefore, if a debt is not settled or resolved, then the debt will remain as long as the creditors are legally allowed to chase you for it. For example, a money judgment can last for 20 years in New York. Original lenders and 3rd party debt collectors will always attempt to collect unpaid debts plus interest and penalties. The tax authorities (IRS and states) will always attempt to collect taxes on forgiven debt and/or rental income. Keep in mind that the Mortgage Forgiveness Debt Relief Act ("MFDRA") provides a tax exemption for forgiven debt in certain circumstances. However, the MFDRA is set to expire December 31, 2012 unless the federal government renews the law.
Got Questions? [I] have read alot about it. I don't think i would qualify for a short sale as i have income, but bank only wants to lower interest for five years on a loan that is $100k underwater. I hate the abandoned neighborhood and the house is falling apart even though it was built in 2003. AZ is a non-recourse state. I am current on 1st mortgage there is no second. I need to find somewhere to live. 1.) WHEN SHOULD I TRY AND RENT A NEW HOME? 2.) How long does "freddie Mac" (serviced by wells fargo) take to evict you once payments are stopped? 3.) should i occupy the home until evicted? I am nervous, worried and frankly afraid. I am a disabled single dad with NO-ONE to help me. I am confused in spite of my reading about what to expect. Please respond as I am fairly desperate. I don't know if I have asked all the right questions or considered all of the possibilities yet. PLEASE HELP! Sincerely, PA
Get Answers…
Dear PA:
Thank you for writing to us.
First of all we can understand why you are seriously considering a strategic default. It is for good reason. You are not happy with your neighborhood, your property is $100,000 underwater, and your property needs repairs. This is not an optimum living situation under any circumstance. Most important, you need to take care of your health needs. In addition to the emotional toll, the financial toll is great. We are confident you can successfully navigate this important decision in your life. You just need solid information and competent guidance. We are here to help you.
You need to ask yourself the following questions with respect to your lender’s willingness to lower your mortgage interest rate. “Does it make financial sense to accept the reduction of monthly loan payments for a home that is underwater, broken, and in a “bad” neighborhood?” What if the lender agreed to the lower interest rate for 30 years instead of 5 years? What if your lender reduced the loan principle balance? For example, Bank of America is offering principle reductions to certain homeowners. Even if you are not with Bank of America your lender may offer a principle reduction. Did you contact your lender to see if there are other options? What if your lender is willing to reduce the interest rate and the principle balance? Will it justify the emotional costs?
Hi. My husband and I are thinking about walking away from our home. We live in Illinois and purchased our home in 2005 for $157,000. In December of 2006 we got a 2nd mortgage HELOC of $18,000. Maxed that on credit card debt and medical bills. In January of 2010 I lost 10% of my pay because of the recession and my husband would work over time all year up until then too. So we lost all that money as well. We were very dependent of his OT. We fell behind on our 1st mortgage. The most was 3 months behind. Finally in November 2010 we got approved and accepted a loan modification on our 1st mortgage with BOA and our principal balance was lowered to $145,000 and the payments we were behind were forgiven. I never notified my 2nd bank HELOC or ever fell behind on payments with the 2nd loan. I am only paying the minimum interest payments. My 2nd loan is with my Credit Union that I have banked with for 20+ years (dont know if that matters). Oh and the loan they gave me as the HELOC, would need to be paid back by end of 10 years. Well that isn’t going to happen. So now I have fallen 1 month behind on my 1st mortgage with BOA. Still paying my 2nd on time. Have looked on zillow.com to see that my home is currently worth on their website $91,700. It needs a ton of work not to mention. Needs a new kitchen as I think its the original kitchen from when the house was built in 1960. The bathroom is full of mold and the basement is 1/2 finished. And also, my husband and I have maxed out our credit cards AGAIN which is about $10,000 total. I need a new car as the one I have has 198k miles and my husband and I just purchased a used one last year that we still owe $5k on. We are thinking of just buying a new car for me and then just walking away. We don’t think it’s worth paying for something that is worth almost 1/2 of what we owe on it and not to mention the additional money it needs to fix it up. I'd like to actually pay off my credit cards when I walk away, but don’t know if just filing for bankruptcy for everything EXCEPT the cars would be best.
Can you help me? I so look forward to your advice.
MRA
GET ANSWERS…
Dear MRA:
Thank you for writing to us.
In our previous posts, we placed an emphasis on understanding the financial risks and consequences of a strategic default. Before we discuss the risks and rewards, let’s focus on what you want to achieve. In other words, what do you plan to gain from a strategic default? Our site has always maintained that the primary purpose of a strategic default is to preserve cash, savings, and wealth. Ultimately your goal should be to place you, your family and/or your business in a better financial position.
“The eviction from their million-dollar home could come at any moment. Keith and Janet Ritter have been bracing for it — and battling against it — almost from the moment they moved into the five-bedroom, 4,900-square-foot manse along the Potomac River in Fort Washington. In five years, they have never made a mortgage payment, a fact that amazes even the most seasoned veterans of the foreclosure crisis. The Ritters have kept the sheriff at bay by repeatedly filing for bankruptcy and by exploiting changes in Maryland’s laws designed to help delinquent homeowners avoid foreclosure.”
From the news article we learn that the Ritters purchased their house for $1.29 million. The purchase involved a mortgage loan of $1 million. The monthly mortgage loan payment, at the time, was $7600 a month. So if the the Ritters did not make a $7600 monthly payment for 5 years, they essentially "earned" or saved or spent $456,000 ($7600 per month x 12 months x 5 years). The Ritter’s story raises several important issues for all people who are actively strategically defaulting. First. What do you do with the money saved from not paying a mortgage? Second. How do you keep the proper mindset/focus during a strategic default? Third. What your ultimate objective of a strategic default? Let’s look at the Ritter’s situation to see if we can “glean” their mindset and determine what they did with the $456,000 in additional savings and/or income.
“During the boom, they set out to become mini real estate moguls, buying properties and flipping them for a profit. In the process, Keith Ritter, 54, [became] a successful real estate investor and landlord with a six-figure income. Then, when the housing market tanked five years ago, the couple found themselves facing multiple foreclosures. The Ritters have tried to negotiate different payment arrangements with their lender to save their posh home near National Harbor, they said, but to no avail. 'It was never our intention to get here and never make a mortgage payment,' Keith Ritter said. 'We don’t believe in living for free.' But he and Janet, a 51-year-old real estate agent, make no apology for using every tactic available to them to stay in their house, including challenging the foreclosure sale in court, requesting mediation and claiming they had a tenant living with them…“When a bank does all it can to save itself, that’s good business,” Keith said. “When a homeowner does the same thing, he’s called a deadbeat.”
The basic rules of Deficiency Debt Defense 101 are an ever growing list of MUST DO and MUST IMPLEMENT RIGHT NOW basic strategies in order to achieve the goal of deficiency debt defense.
Deficiency debt also known as debt deficiency arises when collateral that is used to secure a loan cannot satisfy the total amount due on the loan. It happens most often with debt involving real estate. However, it can occur in other types of collateralized loans such as car, business, and equipment loans. When a loan goes unpaid, the lender has the right to auction off the property to pay off the debt. If the lender collects less than what is owed at the sale, the shortage is called debt deficiency. A lender can turn a debt deficiency into a deficiency judgment. Please read What Everyone Should Know About Debt Forgiveness, Obligations and Deficiencies to learn more about debt deficiency and the consequences of a deficiency judgment.
The primary goals of deficiency debt defenses are to:
1. Reduce the Risk and Amount of Deficiency Debt.
2. Strengthen Your Defenses Against Deficiency Debt.
3. Lengthen The Time To Pay Back The Deficiency Debt.
A proper defense requires that you plan and prepare now. So make sure to implement all of these rules. Make sure you come back and read these rules every month. We will be adding new rules along the way. Also, each rule will be further detailed and expanded in future blog posts. We will do our best to apply each rule to a real life scenario.
In the meantime start reading and start preparing.
1. Do not ignore any legal papers. Always prepare a defense to every legal action. Always respond to a legal action in writing. It LENGTHENS the time and STRENGTHENS your defense 100% of the time.
2. Try to save every debt collection message with a live voice on your answering machine. Save messages that appear to be aggressive, intimidating, or threatening. It may be useful if you need to prove a creditors improper tactics. Make sure you keep track of calls about your debts to other people or businesses. There are creditors who may contact family, friends, or business associates. This must be stopped. You can use a cease and desist letter to try and put a stop to phone call communications.
A local news station in Arizona,ABC15.com, portrays strategic defaults as if it is a new phenomenon. Many of our readers understand that there is nothing new about "strategic defaults". Despite a few of the negative statements made by the newscasters one thing is made clear: A properly planned and executed strategic default can improve the financial future for yourself, your family, and your business.
In the end even the newscasters are unable (or unwilling) to seriously argue against a strategic default. The bottom line is that a strategic default will continue to evolve into a financial tool to preserve cash, savings, and wealth.
The decision to strategically default should never be taken lightly. It requires serious consideration, careful planning, a team of knowledgeable professionals, a thorough understanding of the risks and rewards, and the confidence that it will place you in a better financial position.
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:
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.
