Strategic default is simple: it's the intentional
act of going into default on your student loans. However, there's still a
misnomer here Joshua Cohen, a student
loan debt attorney, sums it up best: "First, when we say
strategic, that almost sounds like it’s purposeful. I think that’s incorrect.
Many of these strategic defaulters have no choice but to default. They simply
cannot afford the payment. When I say strategic defaulters, it means there is a
plan to deal with the debt, not that they actually default when they could
afford the payment. It’s not the default that strategic, it’s the what to do
after it defaults that is." And it's that idea - what you do after
the default that is strategic - that is powerful for borrowers. Read
more at Forbes.
The city is taking on lenders of “zombie homes” —
decrepit, vacant, distressed houses with unpaid mortgages, which have forced
the city to conduct emergency repairs and maintenance. The city’s
Department of Housing Preservation and Development is seeking more than $1
million from CitiMortgage, Wells Fargo and other home lenders who have
allegedly failed to maintain houses on the brink of foreclosure, the
department announced. Read
more at The Real Deal.
Each state has different rules around credit
freezes, but in some states, it costs $10 to place a credit freeze on their
account and another $10 if they want to lift the freeze. Not anymore
though. Going forward, consumers can freeze their credit for free at
Equifax, TransUnion, and Experian. A credit freeze prevents lenders
or other credit providers from opening a new account without a consumer
unfreezing their credit. Read
more at Housing Wire.
In the second quarter of 2018, New York City foreclosures stagnated both year-over year and quarter-over-quarter. 881 homes were scheduled for auction for the first time, compared to 911 in Q2 2017...Citywide, the number of foreclosures is stable but high. Read more at PropertyShark.Com.
In 2010, I wrote the book Strategic Default: How to Create a Brighter Financial Future for You,Your Family or Your Business. Since then I have helped many people save their homes or investment properties from foreclosure. With my assistance homeowners obtained loan modifications. I devised strategies for “holding off” lenders during foreclosure proceedings by sharing my investigative research with clients and their attorneys on the misuse of loan and foreclosure documents. I have negotiated principle and interest rate reductions for myself, friends and clients at times eliminating the entire principle balance. I have obtained loan modifications and principle reductions on the loans for my properties.
What started out as financial self-preservation became an experience in how to turn failure into success. I helped over 100 people save their homes or investment properties and, most importantly, I helped the same clients “create a brighter financial future” for themselves. With my work came the greatest satisfaction: Helping my friends and clients regain their sanity and confidence while protecting their family and financial livelihood.
By joining with me to “fight the fight for financial self-preservation” all of us so called “strategic defaulters” ended up regaining personal and financial security. I finally understood 2 simple truths. First. Failure can make you better because it opens the door to humility. Second. The path to success is intertwined with the success of others. Therefore, it is important to give the best of you to the rest of us.
For me, getting here was not an easy journey.
In 2006, my descent to personal and financial ruin began to pick up pace. I was an arrogant, “too smart for my own good”, real estate attorney. On top of that, at the time I neglected my marriage by being singularly focused on work and entertainment. Absolutely forgetting my mother’s and my father’s lessons about developing personal integrity, ensuring family support and being true to oneself I became a greedy, self-centered person who refused to listen.
By 2007 I was in foreclosure on all my properties while my law career was slipping away through my fingers. In 2010 my marriage came to end (no children) and I was forced to resign from the practice of law. My reputation was in tatters. I lost the respect of friends and colleagues. I was close to the edge of total personal and financial ruin. I became so paranoid that “everyone knew I was a loser” I hid myself from family, friends and the outside world.
Why am I sharing all of this?
Well there are reasons why certain outcomes befall each one us. As time went on it became clear that I needed to lose everything in order to shed the “fake”, scared, insecure man standing in front of the mirror.
The first step: Learning how to clear my mind of “self-made” fears and negative thoughts. So, I became serious about practicing meditation, Chi Gung and yoga.
During my worst I learned to become my best. I met my best friend who became my wife. I worked (and continue to work) long and hard to repair broken relationships in order to regain trust. I am paying off most debts. I sought the advice of many close friends, mentors, elders and respected professionals. I embraced the pain of rejection as motivation to become a better person. I took it on the chin because I was told it was the only way to survive.
The wise words of a close friend soon became true: “Things are only as bad as you think they are. Change your thinking.”
Now, in 2020, I am happily married with 2 beautiful children. I became a yoga teacher after studying in India. My partner and I operate a yoga studio in Brooklyn, New York called Greene Moments Studio. I am a New York State licensed real estate broker. I am an expert in strategic default consulting, foreclosure prevention and loan modification negotiations. My work has helped property owners regain tens of millions of dollars in equity as they have been beneficiaries of rising real estate market values. I am proud to have helped people gain their peace of mind.
Most importantly, with the support of an amazing family I have become the best version of myself.
Remember that you are not alone on your journey and you always have the power to change for the better.
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.
Sincerely, MD
Get Answers...
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...
Firstly, I want to thank you for your site which has provided some invaluable insight into the possibility of strategic defaulting.
My husband and I have been challenged by the recent downtown in the housing market. We have a home (on which I’m the primary, my husband the secondary borrower). We also have condos each (each of us are primary borrowers on one of them). The home is now worth $300,000 less than the $1.2million we paid for it (and $100,000 less than our mortgage). The condos are worth approximately half of the $600,000 we paid for them. I have just lost my job, and job prospects look bleak for me at this time. My husband is working, but cannot cover all of the mortgages.
We have been considering strategically defaulting on all of the properties and moving into a rental property and simply cutting all our losses (effectively starting again). We have also considered strategically defaulting on the home and living in one of the condos (we think this I the better solution). My husband could pay the mortgages for both condos, they are not in a location which can be rented. We’re concerned about the ramifications of such an action however, we are sure that at this point, we must lose at least one of the properties we are making mortgage payments on.
We realize we are in a recourse state (GA). How will my being first on the note affect my husband who is second? Any deficiency awarded against me solely at this point cannot be satisfied as I have no income. As my husband is the only one who is working, how likely is it that any such deficiency will be garnished against his wages?
Thank you for any help you can provide.
DF
GET ANSWERS…
DF, thank you for contacting me.
First things first. You and your husband are equally liable and equally responsible for the mortgage loan if you signed the note and your husband signed the note. I am being specific about the note not the mortgage. A lender or creditor will not differentiate between who signed the note first or last, as long as it has been signed by each party. The note a.k.a. promissory note gives a lender the right to collect all of the money from any person who signed the note. A note is evidence of a loan of money. A mortgage is a security lien against the property. A mortgage is not a promise to pay money.
The primary risk of a strategic default is a deficiency debt. The other risks are:
1. Lower credit score. 2. Loss of the home or property to a foreclosure sale. 3. Recently,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 that person strategically defaults. 4. 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.
However, my experience has established that most people who strategically default are most concerned about deficiency debt. Most people do not want to be chased down for more money by creditors or lenders.
Let’s go through deficiency debt issues carefully.
A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note or mortgage loan, in full.
You mentioned that you live in a recourse state. You appear to understand that a recourse state allows the lender or creditor to seek an unsecured money judgment for any deficiency. Also, a deficiency judgment has a time period. In some states a deficiency judgment can last up to 20 years. So even if you have no income now, you may have income in the future. Read this link about Recourse and Non-Recourse states to learn more.
If a lender or creditor forgives the deficiency then you will not be exposed to a deficiency judgment. When a lender or creditor agrees (IN WRITING) to forgive a debt as opposed to seeking a deficiency judgment, then the forgiven debt may be considered income by your state taxing authority and the IRS. Forgiven debt is income.
So, if you consider strategically defaulting on your (primary residence) home AND you can negotiate debt forgiveness with your lender, then you will not have any exposure to a deficiency judgment and you will not have any federal tax liability.
The question is What Does It Take To Get The Lender To Agree To Forgive Your Debt?
The answer is: you must successfully negotiate a principle reduction, short sale, or a deed-in-lieu of foreclosure AND get the lender to agree (IN WRITING) to forgive any deficiency. You want the creditor or lender to give up its right (IN WRITING) to seek a deficiency judgment.
A principle reduction is when a lender or creditor agrees to reduce the principle balance of a loan.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property. A full settlement of your total outstanding mortgage debt eliminates a deficiency and tax liabilities. A partial settlement still leaves open the possibility of a deficiency judgment or forgiveness of the remaining balance.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000.
In all the above cases you must get the lender to agree to forgive the deficiency.
Beware of the Turn In Your Financial Documents Trap. This happens when the lender’s representative asks you to turn in your financials via telephone or fax in order to see if you qualify for a loan workout, principle reduction, deed-in-lieu, or short sale. Before you agree to turn over your financial documents ask the lender to send you something in writing stating that they will seriously consider a work out option if you turn over your financials. Or ask the lender to direct you to their website regarding their loan workout processing rules. The problem I have is this: What happens to your financial documents, if your lender refuses to negotiate a loan workout? Can the lender use this information against you? For example, can the lender use the information during a foreclosure action or during a lawsuit seeking a deficiency judgment? In order to collect on a properly obtained deficiency judgment, the creditor or lender must locate your bank account, or locate your investment account or locate your place of employment or locate any other asset that has value. I don’t think anyone wants to turn over their financial documents to be used in any way to take their money.
If you do decide to turn over financial documents to the creditor or lender, then cross out all of the account numbers. If the creditor or lender refuses to work with you after you have turned over your financial documents then immediately move all of your money and your investments to another financial institution.
A creditor or a lender has the right to garnish wages if it properly and legally obtains a deficiency judgment in a court of law against a person who entered into a legal loan agreement with the creditor or lender. So yes, your husband could be exposed to wage garnishment if the creditor or lender successfully obtains a deficiency judgment against him.
Keep in mind that even if a creditor or lender successfully obtains a deficiency judgment, it does not mean all is lost. You can negotiate a settlement with the creditor or lender. The creditor or lender may take 50% or less than what is owed instead of spending time in court. Also keep in mind to NEVER LET A LAWSUIT FOR A DEFICIENCY JUDGMENT GO UNDEFENDED. NEVER IGNORE THIS TYPE OF LAWSUIT. The simple reason is that you may stop the creditor or lender from getting a judgment or you may be able to use your defense to this lawsuit as a means to negotiate a settlement.
You should seriously consider working with a qualified attorney and/or accountant in order to understand your specific risks.
You have to make some difficult choices. I am confident that once you understand you options you will get through this successfully.
I purchased a home in 2006 for $1,075,000. It is a beautiful lake front home in NC. I have a first for $985,000 and the balance in a second. I invested another $+/-$200,000 in landscaping shoreline, etc...
My income has been impacted due to the economy in the last 2 years. I have tried refinancing with one appraisal coming in at $1,275,000 and one at $985,000. Neither would qualify for 80% equity.
The house has been on the market for 2 years offered for both lease and/or sale with no offers. Real estate professionals say there is a 10 year supply of million dollar homes in my area.
I could take money out of my 401k to keep things going but here is my thought process. If my mortgage is $6,500/month and it may take years to recover or get back to zero, it makes sense from a business perspective to put that money elsewhere.
My loan is with one of the big banks and they have denied me any type of modification or other and said they couldn’t consider it unless I was at least 90 days delinquent. To further clarify, the mortgage is in both my name and my fathers name with me as the primary and him as the co-borrower. He is retired but has retirement money in annuity and ira. He also owns a home in GA that has some equity in the amount of maybe $50-100k. My wife however is not on the mortgage as the home was bought 2 years before we got married.
So I am considering all options including just stop paying, deed in lieu, short sale and loan modification. What are the consequences, likely hood of outcomes and advice do you have as I am lost at sea?
GET ANSWERS…
Mr. D.
First of all thanks for writing.
One key point to recognize is that any decision you make regarding your mortgage will expose your father to the same consequences. Furthermore, he will need to sign off on any option you decide to implement.
It seems as if you have a general understanding of your options. However, I still want to go over each one again. After each option, I will point out the risks. I will also underline key points that are a bit more specific to your situation.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may be willing to accept less than the full amount due on a mortgage. If you owe the lender $400,000 then the lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency.
A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate. You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called a non-recourse state. North Carolina has an anti-deficiency statute which seems to apply in certain circumstances. I recommend you speak with an attorney to see if this anti-deficiency may apply in your circumstances. A link to the statute is here: http://www.poynerspruill.com/publications/Pages/NorthCarolina'sNewAnti-DeficiencyStatute.aspx
There is certain debt that cannot be attached by a creditor. Under Federal law, there are strict limits against attaching a 401k loan. Essentially, if money is transferred into a 401k just to prevent a lender from collecting then a lender may be able to attach the money. This is generally hard to prove. It may not be a good idea to deplete your 401k account.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.
If you decide to utilize a short sale or a deed-in-lieu the lender normally requires evidence that the property has been listed for sale. Furthermore, a lender may ask to see your financial information as part of any negotiation.
It’s best to work with a real estate broker or attorney who has experience in short sales. It’s a time consuming process involving multiple parties. It requires substantial paperwork. If you do work with a professional make sure you negotiate a “pay for success” agreement. Many states have no upfront fee regulations.
If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back at the auction sale, then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.
As I pointed out before, if a debt is forgiven then it may be consider a taxable event. Forgiven debt is considered income. You should contact an accountant to determine if you may have any tax exposure to forgiven debt. Especially, if you are in a higher income tax bracket.
The lender for the second mortgage may forgo foreclosure proceedings and sue you and your father personally for the loan. Most second mortgage lenders or HELOC lenders recognize that it will not collect any money from the sale of the property once the loan goes into default. However, these lenders are willing to negotiate a settlement of the outstanding balance. For example, the second mortgage lender may take 15 to 30 cents on the dollar with a monthly payout on the settlement amount. You must negotiate a forgiveness of the difference owed to the lender if they agree to settle.
It’s sad to say that you need to be delinquent before a lender will enter into good faith negotiations to modify your loan. It is currently a fact that a lender has no incentive to modify a loan if they are collecting payments.
Your father’s 401(k) should be safe from any creditor collections efforts if a deficiency arises. However, if a creditor successfully obtains a proper legal judgment then the judgment can be placed as a lien against your father’s property or other assets.
The likelihood of success is based on one rule: You need to fight extremely hard to get what you need from the lender.
The next important issue is to preserve you and your families’ cash, savings, and wealth and to limit your exposure once you have decided to implement a solution.
Please read the following articles and posts. This will help you significantly.
My wife and I have been trying to sell our home for nearly a year. We have had little or no traffic no matter how much I lower the price. We CAN afford the payments, it's just that the home has become way too small for our family size.
I have been pre-approved for another loan on a much larger house with the payments being almost identical. This would be a new build and the loan would be in place before I defaulted on my current mortgage. I was approved to carry both mortgages.
What are the consequences besides taking a credit hit if I default? My wife and I are both over 750 credit rating. Are there any other options for my situation?
GOT ANSWERS…..
If you default, in addition to the negative impact to your credit score, you may be responsible for a deficiency. A deficiency is the difference between what a lender is owed on a mortgage and what it receives. I will explain this in more detail later.
If you want to keep your credit intact, you may consider selling the property at loss and covering any short fall out of pocket. For example, if you find a buyer for your home at $400,000 and your closing costs including the money you owe the bank are $425,000, then you can come up with the $25,000 short fall at closing. Another alternative is you can look for a tenant for current property to cover the monthly carrying costs when you decide to move. You may have to cover the difference from the rental amount and the carrying expenses. Of course, the key questions are: how long are you willing to carry the house and when will you be able to sell the house?.
If you decided to default, you have various options.
You can utilize a short sale, deed-in-lieu, loan modification or let the property go to foreclosure sale. All of these options will negatively impact your credit and will expose you to a possible deficiency.
A short sale occurs when a lender let’s you sell your property for an amount less than what is owed on the mortgage. Essentially your lender may bewilling to accept less than the full amount due on a mortgage.If you owe the lender $400,000 thenthe lender may agree to let you sell the property for $350,000. Keep in mind that the $50,000 difference will become a deficiency. A deficiency balance can be forgiven or it can become a judgment. If the deficiency is forgiven then there may be a tax liability. The lender may refuse to forgive the deficiency and instead seek a deficiency judgment. This is a legal judgment obtain by a lender after filing the proper legal paperwork in court. If the lender successfully obtain a deficiency judgment then the lender has the right to seize the cash in your bank accounts, garnish wages, or place a lien on personal property, business assets or real estate.
A deed-in-lieu is when you enter into a written agreement to give the property back to the bank. The key is to negotiate a full settlement of your total outstanding mortgage debt including fees and penalties in exchange for the deed to your property.
You may be able to modify the loan for a lower payment or a reduction in the principle balance.
If you let the property go to foreclosure sale then the lender will sell your property at an auction. If the lender takes the property back then you will not have any deficiency. If the lender sells the property at auction for less than what is owed then there will be a deficiency.
You may not owe a deficiency in certain circumstances. The Federal Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides relief to homeowners from paying taxes on any forgiven debt. Also certain states have anti-deficiency statues. This means that state law prevents a lender from pursing a borrower for any debt deficiency. A state that prevents a lender from pursing a borrower for any debt deficiency is called anon-recourse state.
Please read the following articles and posts. This will help you significantly.
