Foreclosure Attorneys in Tampa, St. Petersburg & Sarasota Answer the Question - What is Strategic Default?
The phrase "strategic default" describes a borrower's decision to default on a mortgage even though the borrower has the financial resources to continue making payments. Strategic default is not a new phenomenon, but its prevalence has exploded since the housing-bubble burst and millions of borrowers have been left with a mortgage that far exceeds the value of the property. A portion of those in default have chosen to walk away from the property even though they have the ability to keep up with the mortgage.
The concept is simple; a borrower that has the ability to continue paying of a mortgage but instead chooses to default and let the lender sort it out. However it is difficult to say how many borrowers are utilizing strategic default and how many just flat out cannot afford to pay. What exactly does "financial ability to pay" means in this context? If a borrower refuses to take a second job, or doesn't curb spending in other areas, is their default strategic or necessary? There are no ready answers to these questions but nevertheless, strategic defaults are real and are having vast effects on the troubled housing market.
The enabling benefit to borrowers who utilize strategic default is the lender's general inability to get a deficiency judgment. A deficiency judgment occurs after a judge orders a court injunction against the borrower to pay to the lender the difference between the value of the mortgage and the value of the repossessed property. While 39 States, including Florida, have "recourse" laws in place that allow lenders to chase defaulting borrower's assets, borrowers are typically able to walk away from a mortgage without fear the fear of a deficiency judgment because the cost of lawsuits to pursue the debt is cost prohibitive to the lender. The biggest consequences for borrowers defaulting on a mortgage, strategic or not, is the negative impact to their credit scores, and the inability to apply for a new mortgage for a set period of time, depending on the lender.
A recent Morgan Stanley report stated that in February 2010 about 12% of past-due mortgages were the result of strategic defaults. Mega-lender Fannie Mae is trying to curb this trend. Fannie Mae cites the breakdown in communication between borrower and lender that occurs during strategic defaults as most costly to lenders. The Lender is implementing new penalties for borrowers who do not contact the lender to avoid foreclosure before defaulting will now have to wait seven years until they are eligible for a new mortgage loan, while those who attempt a workout plan can get a new loan in as few as three years.
To complicate things further, are the moral and ethical issues involved. Obligations to honor a contract are balanced by obligations to oneself and one's family, the latter speaking in favor of strategic default, some arguing "You need to put yourself and your family's finances first," while one also has obligations to a community, which may be damaged by default.
Regardless if you live in St. Petersburg, Sarasota, Tampa, Brandon or anywhere else in the state and are considering strategic default as an option to get out of an underwater mortgage, please contact Yesner & Boss, P.L. for a consultation to review your options and determine a course of action that is personally tailored to you. |
