For many homeowners, a plummeting housing market has transformed a previously prudent investment into an oppressive financial burden. Engaging in a strategic mortgage default with the help of a foreclosure defense attorney may be one of your best options for controlling damage to your credit. If you’ve found yourself in a tough financial situation with your mortgage lender, then consider whether or not strategic default is a feasible option for you.
What is a Strategic Default?
A strategic default occurs when a borrower who is able to pay their mortgage chooses to stop because a property’s value has dropped significantly below the mortgage debt owed on it. Because strategic defaulters (as opposed to seriously financially distressed borrowers) are more likely to have higher income and assets, the decision to stop the payments should include asset protection considerations and strategic planning.
- What are its Consequences?
As with any other foreclosure, the direct consequences of a strategic default are fundamentally the same. It’s important to understand that the strategic default decision is not the end of the discussion, but rather, the beginning. The decision to discontinue payments should lead to the next question—“now what?” A borrower may simply give up and allow the lender to foreclose, but this is a terrible idea. In most cases, attempting a short sale of the property will be the best damage control option.
Although getting short sale approval is often more challenging for the strategic defaulter due to the lack of “hardship” the lender expects to see, the borrower should not consider this a “zero sum game.” There does not need to be an absolute winner or loser in this process between the borrower and lender. Quite often, strategic defaulting borrowers will agree to bring money to the closing table in exchange for a release from a much greater mortgage debt and an exit from a bad real estate investment. The borrower should consider that the credit damage resulting from a short sale could be overcome in as little as one and a half to two years.
- The Moral Question
Many borrowers who retain the ability to pay the mortgage resist the idea of strategic default because of moral considerations. They adhere to traditional values of honor and integrity and the notion that signing a “promissory note” means a promise to pay. This moral question deserves a detailed and thoughtful reply. A good place to start is by reading the moral discussion in University of Arizona Law Professor Brent White’s excellent article [link]. In essence, a strategic default is not an avoidance of the consequences of the mortgage; it is the acceptance of them. A borrower signs a promissory note, which is a legal contract to repay a loan. The note is secured by a mortgage, which is the borrower’s consent to allow the lender to take title to the property upon failure to repay the note. The probability of defaulting on the note is factored into the deal through the mortgage. Otherwise, the lender could simply lend the money unsecured, as with credit card debt.
For the lender, as with any other corporation, the bottom line is the bottom line. It’s a business transaction and the parties in any business deal are expected to act in ways to further their own self-interests. It is hypocritical and unfair to expect an individual borrower to sacrifice his own self interest for the benefit of the other party in the deal—the lender. There are endless examples of naked self interest in the corporate world trumping moral considerations, including the noteworthy instance where Morgan Stanley strategically defaulted and walked away from its obligation to pay on several upside down properties it owned. In the business world, we eat our mistakes. Unfortunately, the control of our government by Wall Street and their partners in crime in the lending industry have created a world of socialized losses and individualized gains, as the “too big to fail” federal bailouts have sadly demonstrated.
If lenders recklessly issued mortgages on the faulty premise of continuing rising home values to provide their “cushion” and they were tragically wrong, it should not fall on the borrower (the less sophisticated party in the deal who had no choice but to accept all the lender’s terms or not do the deal) to bear the burden of the housing market collapse. This brief discussion does not do justice to the moral question, but it’s a start. Any borrower considering a strategic default should contact the law firm of CPC Law to discuss all the ramifications, including the moral issue and create a strategic game plan.