Wednesday, May 27, 2015

Got Questions? Get Answers... MD Is Concerned About Her Family's Future And Is Considering Strategic Default

Got Questions?

To Whom it May Concern;

I came across the term 'strategic default' recently while researching the idea of letting my home go into foreclosure. I am not a homeowner struggling to pay my bills, I have excellent credit and not very much credit card debt.  I was looking for a way to avoid bankruptcy if possible.

I purchased my home about 7 years ago.  I was a single mom of 2 young boys and my tiny, 2 bedroom ranch made perfect sense for us at the time.  I planned on making improvements over the years and being able to some day sell my home and make a profit.  However, we are now desperate for a bigger home and unfortunately owe more than I could sell it for.  I have talked to representatives with HARP who say that because I have no trouble paying my mortgage that they can't help me. I have talked to my mortgage servicer and they can't help me either.  I would not qualify for a short sale, deed in leiu or even to refinance.

I struggle with this idea feeling that staying here and paying my mortgage every month is the morally right thing to do but this home no longer suits our needs as a family and is in need of repairs that I simply cannot afford. I met with a "real estate" attorney thinking he could help guide me.  He had never heard of strategic default or the mortgage debt relief act.  He was unable to tell me anything.  He said I was asking a lot of what if type questions he couldn't answer.  He told me because I pay my bills I should simply keep doing that.

I came across your website and it said you offer consultation on such a process and to email you.  So, I would appreciate any information you could provide to help guide me in the path that is right for my family and I.

Thanks for your time.



Get Answers...

Thank you for your question.

First of all, it is definitely reasonable why you are seriously considering a strategic default. Not only has your family outgrown a home in need of repairs, you also owe more than your property’s current value. This is not an optimum living situation under any circumstance. 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.

There is a true inner struggle for property owner's during the strategic default process. The process is stressful. Since a strategic default requires the non payment of a debt, the homeowner must face all of the negative aspects of the debt collection process e.g. negative credit, collection phone calls, collection letters, strange visitors, threats, legal action, foreclosure, eviction and an "irrational" fears of governmental scrutiny. The moral imperative felt at the beginning of a strategic default is quickly subsumed by the financial gains arising from the strategic default process.  My experience working with homeowners over the past ten (10) years has led to one inescapable conclusion: A properly executed strategic default is financially beneficial since it achieves the homeowners goals of cash flow and savings protection and wealth preservation.   

Let’s begin by reviewing all of the strategic default approaches (including ones which you may be eligible for if you decide to stop making mortgage payments). Afterwards, we will list various key action steps for each approach as well as the potential risks of each approach. Keep in mind that in order to execute a successful strategic default strategy you must have a thorough understanding of the strategic default process, you must prepare a written action plan and you should seek the advice of competent professionals. 

Strategic Default Approaches

Foreclosure: You can decide to stop making payments and let the property go into foreclosure. The foreclosure process begins when your lender “serves” you with a legally required notice and/or complaint. Once the foreclosure process begins it will take the lender some time to sell your property at a foreclosure auction.  Each state has specific laws regarding the foreclosure process. There are states that allow for a judicial process or a non-judicial foreclosure process.  Normally the judicial foreclosure process takes more time than a non-judicial foreclosure process. Please read our article: Understanding The Difference Between Judicial and Non-Judicial Foreclosures. In some states it can take six (6) months to compete a foreclosure. In other states it can take as long as thirty six (36) months. If your home is sold at a foreclosure auction for less than what is owed to the bank then there will be a deficiency debt. 

Loan Modification: You can seek a loan modification that not only reduces your interest rate but may also reduce your principle balance. There are homeowners currently receiving "spontaneous" principle reductions without asking due to various settlements with state attorney generals and federal government agencies including the $25 Billion Dollar National Mortgage Settlement. Do not assume you do not qualify. You need to contact your lender to see if you are eligible for a principle reduction.  Furthermore, it is not enough even if the lender is willing to offer you an interest rate and principle reduction. You must obtain an interest rate reduction and principle reduction that is in your best financial interest. Therefore you must put pen to paper and determine what works best for you. 

Sell Property at a Loss and Make up the Difference:  You can decide to sell your property at a loss and use your retirement account and/or savings to make up the difference. You could seek a personal loan to make up the difference. What are the benefits? You will protect your credit score. You will not be liable for any debt deficiency or for any tax on forgiven debt. In one sense you will have peace of mind since the stress of holding on to the property will be eliminated. What is more valuable to you at this time?  

Short Sale:  A short sale is a process in which your lender agrees to let you sell your property for less than what is owed on a mortgage loan. 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.

Deed in Lieu:  A deed-in-lieu of foreclosure is a written agreement with the lender to voluntarily give the property to your lender in exchange for a full release and total satisfaction of the note and mortgage obligation. 

Bankruptcy: Bankruptcy is a process in which you can eliminate or repay some or all of their debts under the protection of the federal bankruptcy court. Bankruptcy can be an effective tool to protect your finances and assets. We are not recommending that you file for bankruptcy however it is important for you to know what it can or cannot do for you. Please visit this link to understand the basics of bankruptcy. Our view is that while bankruptcy can be an effective strategy it should be considered when all other options have been explored. You can consult with a bankruptcy attorney to learn more about its effectiveness.

Key Principles For You To Consider

You need to put pen to paper to outline the various scenarios and to calculate the financial gains and costs. You will need to create a written action plan. A well thought out action plan will help you better allocate time and resources towards a strategic default. It requires discipline, patience, research, and competent advice. It requires a thorough understanding of the risks and rewards. It requires a team of trusted and experienced professionals with expert knowledge. In our Strategic Default Guidebook we discuss the various parts of an action plan and the necessary steps to successfully navigate a strategic default. 

Keep in mind the following key principle: You must obtain any promise or agreement in writing by email, or by letter, or by fax. The bottom line is that it must be in writing before you can act. You must always get a signed original or copy from your lender.  

“Knowledge is Power” when it comes to executing a strategic default. Strategic Default is strictly business, so approach this as a business endeavor. Your ultimate goal is to protect your cash flow and savings and to preserve your wealth.

Foreclosure Sale: Due to the lengthy nature of foreclosure cases, the interval between the start when you stop making mortgage payments to the end of the matter is a critical period where you can save up your cash reserves by eliminating your main housing expense i.e mortgage payments. However, keep in mind that you must always exercise your right to defend yourself during the foreclosure process. Bottom line: You must always respond with a written defense after you have been served with foreclosure papers. It is a fact that a proper written defense to a foreclosure action can extend the time of the foreclosure action and/or can lead to a resolution with the lender. There are various defenses to a foreclosure action. It is possible your lender did not provide the proper paperwork to start a foreclosure action. Your mindset about defending yourself must be unwavering. There are certain states that require mandatory loan settlement conferences during a foreclosure action.  The legal system can be your ally if properly utilized. There are some people who are comfortable defending themselves and there are others who require the assistance of an attorney. At the minimum you should contact your local court for free foreclosure resources and/or consult with an attorney.

Loan Modification: You must contact your lender to determine if a loan modification is acceptable. Be prepared to confidently explain that your mortgage loan is draining you of much needed financial resources. Your financial resources are too stretched trying to both support your family as well as making the necessary repairs in your home. If your lender agrees to let you apply for a loan modification, then you must ask the lender to send you the requirements in writing by email or letter. Your lender will require the disclosure of various financial documents including current pay stubs, tax returns, bank statements, and financial questionnaires. You should only provide the documents requested by your lender, nothing more. You should keep a log of all calls with the lender. You should write down the name of any representative you speak with. The lender may want to review your financial documents to determine if you have a financial hardship. Keep in mind that a loan modification can take as long as 9 to 12 months. Your goal is to reduce the risk of any personal liability for any unpaid mortgage amounts. Thus it is extremely important to minimize your exposure to any potential deficiency judgment.  You need to understand the principles of asset protection. Please visit these links to learn more about debt defense and asset protection.

Sell Property at a Loss and Make up the Difference: Some important questions you must address before doing so are: Can you recover your savings and/or rebuild your retirement account in the short term or even in the long term? In other words, is it in your best financial interest to use your savings to make up the difference? Also, how severely will you be deterred from your goal of purchasing a more suitable house for your family by doing so?

Short Sale: A short sale is an effective tool of debt elimination only if the lender agrees to forgive the deficiency debt. If your lender does not agree to forgive the deficiency debt then you may be personally liable for the deficiency debt. The bottom line is that if your lender does not agree to forgive the deficiency debt then there is little incentive to do a short sale. You may as well stay in your home with the hopes that, over time, it increases in value or you may as well get the "time benefit" of staying in your home during a foreclosure process. 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: What is the Difference Between Non-Recourse & Recourse States? to learn more about anti-deficiency states.

Deed in Lieu: The key principle for properly negotiating a deed in lieu is to get all terms in writing and to ensure that in exchange for your deed the entire note and mortgage obligation is completely satisfied. 

Potential Risks
  •  Deficiency debt can lead to a deficiency judgment. This includes a lender deciding to sue for the entire outstanding debt instead of filing a foreclosure action. This can lead to personal liability for the unpaid debt and it can lead to state and/or federal tax consequences for any portion of the unpaid debt that may be forgiven by the lender. In the past, the Mortgage Debt Forgiveness Act waived all Federal taxes due from the forgiveness of debt. However, it had expired at the end of 2014 and it is unclear if the Federal Government will renew the act. Please read our article: What Everyone Should Know About Debt Forgiveness, Obligations and Deficiencies to learn more about deficiency debt.
  • Lower credit score. Credit scoring and reporting agencies are now taking strategic defaults into account when determining credit scores. Keep in mind that once you stop making payments your credit score will drop. This will affect your ability to purchase or rent another property. So your timing of a strategic default is important.
  • Loss of the home or property to a foreclosure sale. In almost every instance, no matter how long it takes, if a lender is not paid all of the moneys due on a mortgage loan, the lender will eventually be able to exercise its legal right to auction the property in order to satisfy the mortgage balance.  
  • Fannie Mae implemented a rule that bans a person from obtaining a Fannie Mae mortgage if that person strategically defaults. The ban last for seven years. Furthermore, the United States Government may pass a law that bans a person from obtaining a government insured loan, if it is proven that a person strategically defaults. Read this article to learn more.
  • Debt collections tactics, including mail, letters, personal visits to the property, phone calls to cell phone, work, and/or family members. Not all debt collection tactics are legal. You should become familiar with your state’s debt collection protection laws and the Fair Debt Collections Protections Act. Read this article to learn more.
  • You can become personally liability for unpaid balances owed to local or city municipalities for electric, water, gas, housing violations, and/or sewer and unpaid balances owed for real estate taxes. You need to be aware of any and all liabilities.
Action Steps
  • You must seek the advice of an attorney so you are educated about your legal options.  You should ask the attorney to provide written evidence of their experience by pointing to cases that he or she has successfully completed. Simply ask for cases that have been filed in court in the past three (3) years so you can review the publicly available files. You want to see how these cases have been resolved.
  • You must seek the advice of an accountant to determine if you will have any potential tax liabilities. Please read our article: Strategic Default Best Practices: Consider The Tax Implications about the tax implications of a strategic default.
  • You must make sure that all real estate taxes and water bills are kept current. In some cases, the lender will pay the real estate taxes and water bills. Remember, unpaid real estate taxes and/or water bills can lead to a lien and an eventual foreclosure by the municipality or city. 
  • You must make sure that you have a comprehensive insurance policy. Under no circumstance should you allow your lender to provide insurance coverage for your home. This is called “forced placed insurance”. Forced placed insurance only protects the lender for the value of the home in case of a fire. It does not protect your for injury on your property or theft of personal property. In fact, forced placed insurance does not provide you with any protection at all.
  • You must send a RESPA/Information Request to the servicer of your loan. The purpose of the RESPA/Information Request is to determine the "true owner" of your loan, to review current documents in your loan file and to obtain details about charges and fees,  Once a servicer receives a RESPA/Information Request, the servicer is required to respond to your written request within a time period established by law. Please review the following link to learn more about RESPA/Information Request.
  • You must begin to create a written action plan.   

The goal of a strategic default is to create a brighter financial future for you, your family and your business. We hope that the information presented in this article helps you make your first step towards successfully protecting your financial resources. Feel free to contact us with any further questions.

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