What are strategic defaults and deficiency judgments?
A default on a mortgage occurs when someone fails to may their mortgage payment. A strategic default is when someone intentionally stops paying their mortgage because they intend to let the house go back to the bank.. Up until the recent housing crisis, very few people would even consider a strategic default.
The term strategic default is becoming known these days because so many homeowners are "under water" on their mortgage. Under water refers to a property that is worth less than the amount of the mortgage. What differentiates a strategic default is that the homeowner has the "ability" to pay but has simply decided not to pay. Citibank recently estimated that 20% (1 in 5) of borrowers who default on their mortgage have the financial ability to pay.
There are many repercussions of taking such a drastic action. First and foremost, a strategic default will ruin your credit rating. A bad credit rating makes it very difficult (if not impossible) to buy another house, rent an apartment, get new credit cards, and secure a loan for any other reason, such as a car, furniture, or education. Poor credit scores also make insurance more expensive.
Secondly, if you are in a state that allows for deficiency judgments (a recourse state, 38 states are recourse states), the bank can come after you to pay up for the losses it incurred. So if your mortgage balance is $200,000 and the bank foreclosed on the home and was able to net $125,000 from the sale of the property, they could seek a judgment for you to pay them $75,000.
A deficiency judgment is awarded to the bank by the court for the difference between what is owed and what the bank was able to recover when it foreclosed. There are only 12 states that do NOT allow for deficiency judgments, so if you are in one of the other 38 states, a strategic default may not help your situation.
Homeowners who would consider a strategic default really only have two options: continue to pay the mortgage (an obligation that they contractually agreed to when they purchased the home or refinanced it) OR strategically default. Other options such as a short sale or loan modification are not viable options for homeowners with the ability to pay.
For a short sale to be approved, a homeowner must typically prove financial hardship and the inability to pay the obligation. Even when hardships clearly exist, many short sales have not been approved and the homes went to foreclosure anyway.
Loan modifications have been extremely unsuccessful with only a tiny percent of applicants getting a modification. Even then, a loan modification will NOT reduce the amount owed but may change either the interest rate, length of the loan, or payment schedule to make it easier for a homeowner to meet the monthly payments and eventually pay the loan in full.
If you are "under water" and want to discuss your options, please call us at 215-513-1333.
~Lisa
Contact Scott Loper, Associate Broker, Realtor®, RE/MAX Realty Group at 215-513-1333 for help buying or selling a home in Lansdale, Harleysville, Hatfield, Souderton, Skippack, Collegeville, North Wales and the surrounding areas of Montgomery County Pennsylvania. To Search for Homes For Sale in Montgomery County Click Here.
Should I Walk Away? - Copyright © 2011, The Scott Loper Team, All rights reserved.
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The Scott Loper Team
Scott Loper - Associate Broker
Lisa Loper - Sales Associate
Gina Wherry - Sales Associate
RE/MAX Realty Group
439 Main Street
Harleysville, PA 19438
Ph: 215-256-1200 x-213
