Introducing Our New Book - Strategic Default: How To Create A Brighter Financial Future For You, Your Family, Or Your Business

I am proud to announce the recent publication of the book, Strategic Default: How To Create A Brighter Financial Future For You, Your Family, and Your Business. You can purchase the book from this website right now. It will be available as an ebook and other publishers, including Amazon, in the near future. 

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:

1. Cash Flow Protection
2. Savings Preservation
3. Wealth Protection 

The primary risks of a strategic default are:

1. Deficiency debt leading to a deficiency judgment. 
2. Lower credit score.
3. Loss of the home or property to a foreclosure sale.
4. Fannie Mae action or government actions against strategic default.  
5. 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. 

Strategic Default: How To Create A Brighter Financial Future For You, Your Family, or Your Business was written for you so you can reach your primary goals, eliminate fear, and live with confidence. Essentially, the knowing and understanding that you made the right decision. Your ultimate goal is to protect your cash, savings, and wealth for you and your family. 

So please purchase and read the book. Then decide for yourself. It can change your life for the better. 

All comments are welcome. 

Thank you.

Augustine Diji

Strategic Default Monitor - Recent News Updates - September 1, 2010

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. 

This next article firmly establishes that business minded investors are strategically defaulting in order to get a better deal. Wall Street Journal Online reports that Commercial Property Owners Choose To Default.

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 prior Fannie Mae announced that it would punish homeowners who 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.

KLavanway Says Don't Let Emotion Get In The Way of a Decision To Strategically Default

Got Questions? Get Answers...DF's Question & Answer Is A Must Read!!!

GOT QUESTIONS?

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.

Now consider this. Under current Federal Law if a debt is forgiven on a primary residence then there is no tax due to the IRS. However, this rule may not apply to state tax law.

Read about debt obligations, deficiency, and forgiveness so you can better understand everything that I have written so far.

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.

KU, An Active Duty Coast Guard Member, Has A Home Defect. Should He Default?

GOT QUESTION?

I purchased my home new three years ago, and had a swimming pool installed. This spring my pool collapsed. Estimated repair costs are approximately $30,000. Neither my homeowners or flood insurance will pay a dime. My home has always had drainage issues; and I came to find out that half of my lot was developed on mitigated wetlands, not disclosed at time of purchase by developer/builder. Both developer and pool builder say this is an act of nature and not their problem. I've been trying to find an attorney, but none seem very interested. Any advice? I live in Alabama, and I am an active duty USCG member. How would a default affect me?

KU

GET ANSWER…

Dear KU:

Thank you for contacting me.

If you decide to strategically default then you face certain consequences.

1. It will negatively impact your credit score.

2. Your peace of mind and space will be disturbed by collection calls, letters, and perhaps visits.

3. It will expose you to a possible deficiency judgment. 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.

Please read http://ezinearticles.com/?What-Everyone-Should-Know-About-Debt-Forgiveness,-Obligations-and-Deficiency&id=3737575 to learn more about deficiency judgments debt obligations, and debt forgiveness.

If you live in a state that does not allow for deficiency judgments then this may not be an issue. A state that does not allow for deficiency judgments is called a non-recourse state. I believe Alabama is a recourse state therefore Alabama may allow lenders to obtain deficiency judgments. There may be new laws in Alabama that protect homeowners from deficiency judgments. Since you are an active member of the coast guard there may be additional state and/or federal protections against deficiency judgments.

Read this link about Recourse and Non-Recourse states:http://www.strategicdefault.org/2010/02/what-is-difference-between-non-recourse.html

You may also consider contacting the bank and telling them about your situation. While the bank may not be sympathetic to your pool problem, they should listen to your “mitigated wetlands” problem. You can tell the bank that the property has a drainage issue and you were not given full disclosure of certain defects in the property. You can offer to give the property back to the bank in exchange for the complete and full satisfaction of all of the debt that is owed to the bank. This is called a deed-in-lieu of foreclosure. This will eliminate any deficiency judgment risk. The key is to get any agreement with the bank in writing.

You would have to look at your original contracts to determine if the builder and/or pool installer are liable. Just because they say it’s not their fault does not mean it is.

You mentioned you were unable to find an interested attorney. I am surprised. You will need a qualified professional to help you. I am sure there is someone who can take your case.

Please feel free to contact me with any questions.

Thank you.

Government Seeks to Punish Ordinary Citizens Who Strategically Default Instead Of Taxpayer Bailed Out Banks, Corporations, & Investors

Yesterday Fannie Mae sent out a press release titled “Fannie Mae Increases Penalties for Borrowers Who Walk Away, Seven-Year Lockout Policy for Strategic Default”.

Before we discuss Fannie Mae’s, lobbyist induced policy let’s make a few points about Fannie Mae a company that is 80% owned by U.S. taxpayers and part of the largest taxpayer bailout in US History.

Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case.

Fannie Mae And Freddie Mac Bailouts Could Cost $1 Trillion.

Fannie Mae stock will be delisted from the New York Stock Exchange.

Enough said on that. Now on to the most important parts of Fannie Mae's new policy to attempt to punish strategic defaulters. These are the key parts of the policy:

1. If a borrower walks away and a.) had the capacity to pay or b.) does not complete a work out in good faith (workouts are defined as loan mods, short sales, and deed-in-lieu), then the borrower will be ineligible for any new Fannie Mae backed mortgage loan for a period of seven years from the date of foreclosure.

2. Fannie Mae will actively take legal action to recoup outstanding mortgage debt from borrowers who strategically default in jurisdictions that allow for deficiency judgments. Fannie Mae will be instructing servicers and lenders to essentially SPY on delinquent loans facing foreclosure and ask these same servicers and lenders put forth recommendations for cases that warrant deficiency judgments.

This is Fannie Mae's rationale "We're taking these steps to highlight the importance of working with your servicer," said Terence Edwards, executive vice president for credit portfolio management. "Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting.”

Well let’s see. Basically Fannie Mae intends to ban strategically defaulting taxpayers from obtaining a mortgage loan from a company that is owned and financed by taxpayers because taxpayers have decided to stop paying their mortgage. On top of that Fannie Mae will get servicers and lenders to SPY on taxpayers to determine if they are strategically defaulting.

The primary ways in which to determine if a taxpayer strategically defaults are the review of tax returns, bank statements, income, savings, and investments. Then balance that against their expenses and liabilities. HMMMM…how can a servicer or bank get that information? The servicer or bank will request the borrowers financial information in order to process a loan modification, short sale, or deed-in-lieu. It get’s the info by PRETENDING to offer a loan modification by taking monthly TRIAL PAYMENTS and then denying the modification anyway…AKA Making Home Affordable Program (HAMP). It get's the info by PRETENDING to offer a deed-in-lieu and then denying it. It get's that info by PRETENDING to allow for a short sale and then denying it.

Can Fannie Mae, a servicer, or lender use financial information collected from a borrower against them in a proceeding for a deficiency judgment?

Of course the missing piece to the puzzle is: Underwater Properties.

What happens if a taxpayer homeowner can establish that their property is underwater thereby establishing it makes economic sense not to pay the mortgage? Which is what Fannie Mae basically did when it was bailed out on its poor investment choice of purchasing and holding worthless mortgage backed securities. It looks like lenders are hoping that the government will shift more of the loss of valueless homes on to taxpayers.

This comes on the heels of the United States House of Representatives introducing a potential law that has a provision barring "government-backed loans for borrowers who had strategically defaulted–walked away from their homes when they could still afford the mortgage payments."

What about basic contract principles? A mortgage loan is a contract between a borrower and the lender. If the borrower stops paying then the lender has specific rights and remedies contained in the contract. Why is Fannie Mae interfering with a borrowers contractual rights?

Can you say "Easily Influenced By Banking Lobbyist?

Can this be legal?

Is this even CONSTITUTIONAL?

Most importantly, WHY DOESN’T THE GOVERNMENT PUNISH LARGE BAILED OUT BANKS AND BUSINESSES THAT HAVE STRATEGICALLY DEFAULTED?

Why is the GOVERNMENT enforcing ECONOMIC Slavery? Why should any taxpayer waste their money on an asset that has no value. Businesses, investors, governments, and countries strategically default all the time.

Oh I see...our government believes banks and business are too big to fail while taxpayers, ordinary citizens are too small to succeed or protest.

Can you tell I am mad. You should be too.

Hip Hop Artist Chamillionaire Gives Strong Reasons For Strategic Default!!!

This is a video by hip hop artist, Chamillionaire. He has made the decision to strategically default.  He did not make this decision lightly. In fact there was negative press regarding the foreclosure of his home. Based on this video, he clearly received advice from financial professionals. Furthermore, his personal circumstances made a strategic default the best decision for himself and his family. At times he is emotional, yet his  decision to stop paying his mortgage, walk away from his "million dollar mansion", and apparently turn the keys over to the lender was all business. There is no shame in strategic default. Pure and simple.

JS Can't Pay A Student Loan & Sallie Mae Is Taking Her Tax Refund

GOT QUESTIONS?

I went to school back in 2005. I attended Lehigh Valley College, during second semester found out that they were going to forcefully shut down or be sold due to money scams with Sallie Mae to get more money from students and the courses not being creditable. I have my student loan through Sallie Mae. At the end of 2nd semester i stopped attending. I have been unemployeed since the end of 2008 and have three children under the age of three. I have not been able to make my loan payments and Sallie Mae has already took my total tax return from last year. Was just wondering if there is anything I can do cause I really can't afford to pay my loans. I can't even get a job cause i don't have a car and where I live we need a car. I was planning to buy one with my tax return so I could go back to work but Sallie Mae had taken the whole return. I don't know if there is anything I can do, and if so how I go about doing it. Thank you and I appreciate any info you have. Thank you JS

GET ANSWER….

Dear JS:

Thank you for writing to me.

Unfortunately you are in a difficult situation. Sallie Mae has the right to collect on the loan using every legally available means. You should consult with an attorney or a non-profit legal services organization regarding your allegations of fraud involving Lehigh Valley College and Sallie Mae.
These are some of your options:

• Contact Sallie Mae and enter into a forbearance or reduced payment agreement. You can request that they stop all collection efforts until you find a suitable job. Once you do find a job then you can ask for reduced payments. You can ask Sallie Mae not to take any future tax refunds. Of course, if there is an agreement it must be in writing.

Please try this link to learn about different options for repayment: http://studentaid.ed.gov/PORTALSWebApp/students/english/difficulty.jsp

• Normally bankruptcy does not discharge a student loan, however there is an exception to discharging student loans. A student loan can be discharged if there is a provable undue hardship. Undue hardship is defined as the permanent physical inability to work. You must prove in bankruptcy court that:

o You’re physically unable to work
o You’re likely to be unable to work for most of the loan term
o You’ve made a good faith effort to repay the debt
o Paying it would prevent you, your spouse, and your dependents from maintaining a “minimal” standard of living.

You need to consult with a qualified bankruptcy attorney to see if you can qualify.

• There are also loan forgiveness programs. The Public Service Loan Forgiveness Program was created to encourage individuals to enter and continue to work full-time in public service jobs. Under this program, you may qualify for forgiveness of the remaining balance due on your eligible federal student loans after you have made 120 payments on loans under certain repayment plans while employed full time by certain public service employers. You can go to this link to learn more.

http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp

So stay strong. I believe something will work out for you.

Thank you.

PBSNews Hour on Strategic Defaulters - Homeowners Who Have Stopped Paying Their Mortgages Even Though They Can Still Afford Them

PBS has news story on home owners who have decided to strategically default. This story, similar to other stories by news outlets, continues to document the growing trend of strategic default. The first homeowner in this video story admits to not making any payments for the past 2 and 1/2 years. He admits to his ability to afford the payments. However, since the lender refused to negotiate a loan restructure or modification, he refused to make payments on a house purchased for $210,000 with a $190,000 mortgage and now only worth $45,000. 

Got Questions? Get Answers...Mr. D Is Lost In Mortgage Sea

GOT QUESTIONS?

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.

What You Need To Know About Debt Forgiveness, Obligations, and Deficiency.

Recourse v. Non-Recourse State.

If you have any other questions please feel free to contact me.