Strategic Default Consequences

When deciding to make the decision to do a strategic default, it is important to weigh the pros and cons. When a homeowner strategically defaults on their home, they are following the mortgage contract that states that in the event of default or non-payment of a mortgage loan, the home shall serve as collateral and the lender has the right to sell the property to get back the money they lent. The lender / bank that lent the money against the home, decided at the time of which the loan was made, that your home was adequate collateral and a reasonable risk. If a homeowner decides that it is in their best interest to default, then the consequences of that decision will be:

1. To give the home back to the lender at the time of the auction, or soon thereafter and
2. Borrower may have 30,60, 90, 120+ days late reported on their credit report.
3. Public notice on credit report of Default
4. Depending upon state laws, exposure to a deficiency judgment
(A personal judgment against the borrower for the remaining balance on the loan after a foreclosure sale.)

It is important to discuss these consequences with an expert to understand them and know if they apply to you. (Click here to see how we can help)

During a normal real estate market, a deficiency is very rare. This is due to lenders not lending more than a home is worth. Depending upon certain criteria, lenders would normally only lend up to 80% of the appraised value of a home. In the event of a foreclosure, the lender would easily recoup the money they lent plus any attorney fees.

In the last decade, a massive real estate bubble began to build and home prices soared to levels that were not sustainable. These homes were simply not worth what the bank was lending their loans on.

When you borrowed money to buy or refinance your house, you entered into a business transaction. The mortgage lender or bank, evaluated the risk of the transaction and decided that it was a worth while risk. To protect its money, the lender required that you guaranty the loan with collateral (the house). In most cases, the lender required you to have some equity or down payment. We know this was not the case in many loans given between 2002-2007. In the event that you didn't pay the loan payment, the lender had the right to take back the house, sell it, and pay itself off prior to you getting any of your equity. (In this case probably zero)

Both the borrower and the lender made a business decision when entering into the loan contract. You decided to borrow money to buy your house, even though it meant risking your down payment (if there was one), home, and credit rating. The lender had risks as well. Turns out it was a bad decision.

It was a business decision. If the lender wanted it to be a moral obligation, they should have said so in the contract. However they didn't. Now if a friend loaned you money with no interest and no collateral, doing so to help you out as a friend, and you promised to pay them back, then of course you would have a moral obligation to return their money. The lender did so to profit from you and did it as a business, therefore, it is indeed a business decision.

Here is a section of a California Deed of Trust that talks about this default:

Borrower and Lender further covenant and agree as follows:
       22. Acceleration; Remedies. Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument (but not prior to acceleration under Section 18 unless Applicable Law provides otherwise). The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform the Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may invoke the power of sale and any other remedies permitted by Applicable Law. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this Section 22, including, but not limited to, reasonable attorney's fees and costs of title evidence.
       If Lender invokes the power of sale, Lender shall execute or cause Trustee to execute a written notice of the occurrence of an event of default and of Lender's election to cause the Property to be sold. Trustee shall cause this notice to be recorded in each county in which any part of the Property is located. Lender or Trustee shall mail copies of the notice as prescribed by Applicable Law to Borrower and to the other persons prescribed by Applicable Law. Trustee shall give public notice of sale to persons and in the manner prescribed by Applicable Law. After the time required by Applicable Law, Trustee, without demand on Borrower, shall sell the Property at public auction to the highest bidder at the time and place and under the terms designated in the notice of sale in one or more parcels and in any order Trustee determines. Trustee may postpone sale of all or any parcel of the Property by public announcement at the time and place of any previously scheduled sale. Lender or its designee may purchase the Property at any sale.

At YouWalkAway.com, we encourage you to make informed decisions. To know how to use the law to your advantage. To make the best of a bad situation. Click here for more information or call today for a free consultation. 1(877) 878-9255