“Strategic default”, has referred to homeowners that can afford their mortgage payments but have come to the conclusion that it is not a sound financial decision to continue to pay on a failed investment. A few years ago, you may not have heard of such a bazaar word, today its a term being discussed in thousands of homes in Arizona, California, Nevada, Florida and others.
The following article is courtesy of Thomson Law PLC Mortgage Mediation Group in Phoenix Arizona.
In the past, a strategic default typically involved abandoning or “walking away” from the home and “jingle mailing” the keys to the lender. That strategy often later proved very “non-strategic” as it lead to any number of problems such as liability for unpaid HOA dues, property liability issues, incidents of vandalism claims as well as potential deficiency lawsuits filed by the lender.
Since the first wave of these lawsuits have hit those homeowners who exited their properties over the past 2 to 3 years, homeowners are starting to realize that just walking away may not be the best strategy. To make matters worse, certain homeowners missed their best opportunity to negotiate a settlement and compromise of a second lien through a short sale. This is a lost opportunity which can later prove to dramatically increase the homeowner’s overall cost and expense to a “walk away”. Even in those cases where their is no deficiency liability, completing a short sale with a full release from the lender is less derogatory to the credit of the homeowner than is a foreclosure.
When a borrower retains qualified legal counsel, the homeowner’s options and potential liabilities can be accurately assessed and analyzed. This benefits both the homeowner (to prevent unnecessary commitments to the lender, such as a cash contribution or a note) and the Realtor (who will be better informed of potential problems that could impede the short sale). Homeowners who are considering a strategic default will typically have more in the way of income and/or assets that are at risk than those homeowners who exit a property due to a financial hardship. Hence, it is of critical importance to determine the potential deficiency liability risks associated with the loan obligations of those homeowners who are considering a strategic default and to create a strategic exit that allows those homeowners to avoid lawsuits from their lenders while preserving their assets.
We have seen a significant increase in the percentage of clients that are looking for a strategic exit from their properties that are under water. About a quarter of our clients a year ago fell into this category which is in line with national averages. Over the past 6 months, however, that percentage has increased significantly.
More and more homeowners are realizing the true extent of the devaluation of their properties and, with the continuing erosion of income in a worsening economy, have reached the inevitable conclusion that they need to exit from their single largest debt obligation. This increase in strategic defaults, however, has not been lost upon the lenders who are increasingly searching for ways by which to seek to impose liability upon these homeowners. More than ever before, homeowners in a strategic default are in need of competent legal counsel to access all options and to provide a strategic exit to their loan obligations through a short sale.
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