Jane Schrodinger was aghast when she learned that she was $80,000 underwater on her “sad little condo” in Washington state. After all, she purchased the condo back in 2008, when prices were low and interest rates were attractive enough to make buying more sensible than renting. Smart move, right?
As we all so painfully learned, prices continued dropping until she ended up where she was – deep underwater on her mortgage. We can’t call Jane a “distressed” homeowner, though. Despite the fact that thoughts of her situation kept her up at night, she was perfectly capable of paying her mortgage every month.
She decided, however, to walk away from her obligation. Not only did Jane fully plan this walk-away, she chronicled the process in a series of blog posts.
Strategic Default
Jane is one of 68 million Americans who see nothing wrong with walking away from their agreement with their lender. This is a process known as “strategic default” – a sanitized name for something that lenders call “jingle mail” (because they typically receive the house keys in the mail) and many others call downright wrong.
Strategic default is, simply, planning (that’s the strategic part) to walk away from the obligation one holds to pay as agreed on her mortgage loan. That’s the default part. It differs from economic default in that the homeowner has the money to pay her mortgage, she just decides that it’s more beneficial not to.
Studies show that there is a certain sub-set of the population that is more prone to strategic default than others. As one might expect, the list includes homeowners who have been denied a loan modification, those who perceive their lender as being evil or greedy, homeowners with previous defaults, homeowners under the age of 45, and males. Surprisingly, a rather substantial portion of strategic defaulters are high FICO scoring, high net worth individuals – the kind of buyers lenders love to lend to.
Should You Walk Away?
While this conversation was more pertinent two years ago, an estimated 7 million Americans remained underwater on their mortgages at the end of 2012. That number is down 4 million from 2011. Many homeowners who could afford to stay in their homes decided to ride out the market and are now beginning to see the light at the end of the tunnel.
If you’re one of those who can pay the mortgage and you’re considering a strategic default, you may want to think about the following:
Your credit score – Jane had a near-perfect credit score when she made the decision to walk away from her loan. During the process she worked diligently to protect her score by obtaining new credit cards, using them and paying on time. That said, the American Bankers Association claims that a foreclosure will impact your FICO score by 100 to 400 points. Furthermore, the public affairs director for FICO, Craig Watts, says that FICO looks at foreclosure as “one of the stronger predictors of future credit risk.”
Buying again – Jane is fortunate that her husband Cory wasn’t a co-borrower on the condo. She happily walked away from the home knowing that they could and would buy again shortly after the default. If you aren’t in a similar situation, you may want to consider that you will be ineligible for a Fannie Mae mortgage for the next seven years. The ABA suggests that you kiss off your chances of buying another home for the next three to seven years.
Tax liability – One of Jane’s biggest concerns was the possible rescission of the Mortgage Forgiveness Debt Relief Act at the beginning of 2013. While congress has decided to extend the act, you may still be liable for state taxes on the amount of debt forgiven in the foreclosure.
Deficiency judgment – When you walk away from your mortgage obligation and the lender forecloses on the home, it will determine the difference between the amount of money you still owe on the home and the amount it was able to realize at auction or sale.
This amount is known as the “deficiency,” and, depending on which state you’re in, the lender may go to court to obtain a deficiency judgment against you. Not only will the amount of deficiency be included in this judgment, but you could also be on the hook for attorney’s fees and the costs incurred by the lender during the sale of the home. In some states, according to Forbes, lenders may also add penalties and interests to the amount owed.
Phantom title – Strategically defaulting homeowners who have lived rent- free for the period of time leading up to the lender deciding to foreclose typically decide to abandon the house when they receive notification that the lender has the foreclosure judgment and is moving toward auctioning the property. Off they go into their new life, pockets full of unpaid mortgage money and blissfully unaware of what is known as the “phantom title.”
Should the bank decide, for any number of reasons, to cancel the auction, title remains with the homeowner. Although the lender is required to notify the borrower that the house was not sold, most strategic defaulters don’t leave a forwarding address and, thus, fail to receive the notification.
What this means is that while you may think you’re finished with the house, it remains your legal responsibility. Phantom title holders may find their wages garnished or their tax refunds seized to reimburse municipalities for moneys spent having to maintain the house or complete repairs due to vandalism. According to Reuters senior correspondent Michelle Conlin, some of these items include “graffiti-scrubbing services, demolition crews, trash removal, gutter repair, exterior cleaning and lawn clipping.”
If the lender can find you, you just might get a court summons or the threat of a jail sentence.
Current housing market – Finally, before you decide to walk away, take a look at current housing market trends. There is a lot of optimism out there, according to the results of Fannie Mae’s December National Housing Survey, especially when it comes to mortgage rates and home prices.
“The highest share of consumers in the survey’s two-and-a-half-year history expect home prices to increase in the next 12 months,” said Doug Duncan, senior vice president and chief economist of Fannie Mae.
Anecdotal evidence from real estate agents across the country shows that buyer enthusiasm is high while housing inventory is low: the perfect setup for a healthy rise in home prices.
In a nutshell, if you are considering a strategic default, think long and hard on the old motivational quote: “Don’t quit before the miracle.”
{ 1 comment… read it below or add one }
When homeowners are late on mortgage payments, the banks scream “default” as if missing payments is a crime. In truth, it is the banks that are often the parties that are, actually, committing crimes – and it is about time they were held accountable. In fact, the current situation is a national disgrace that should no longer be handled with the “deferred prosecution” of bankers (i.e. a voluntary alternative to adjudication where a prosecutor agrees to grant amnesty or immunity to the corrupt bankers in exchange for their agreement to fulfill certain requirements). It is an absolute outrage that any homeowner, that is willing to pay a reasonable and equitable mortgage payment based on current circumstances and economic conditions, should lose his or her home by a foreclosure shown to be the product of a fraudulent investment scheme on the part of, or known by, the foreclosing bank.
Consider the following and you be the judge:
1. Millions of homeowners have been foreclosed and lost their homes for being in default (i.e. missing mortgage payments).
2. A vast majority of these foreclosures took place in circumstances where the banking community, based on knowingly inflated property values and interest rates, pooled the homeowner’s mortgage with thousands of other mortgages – and then sold interests in those “securitized” pools of mortgages to investors. In doing so, the financial community made extraordinary amounts of extra money on the large income streams of mortgage payments generated by that pooling of mortgages.
3. In other words, it was the homeowners’ inflated payments that were supporting a wind-fall of extra banking profits and Wall Street bonuses.
4. However, the homeowner never even knew he or she was being used as an “investment pawn” to fuel what is now being exposed as, perhaps, the ultimate Ponzi-scheme that has all but destroyed the U.S. economy.
5. In most cases, the scheme was put into motion by and through the advent and use of a privately-owned company called “Mortgage Electronic Registration Systems, Inc.” (an invention inspired and organized by the country’s largest banks and mortgage finance firms to, allegedly, improve the servicing of mortgage loans by enabling their electronic transfer and tracking).
6. In fact, millions of borrowers showed up at the closing of their mortgage loans and were never told, nor realized, that they had (through, in most cases, one or two lines of small print in the beginning of only the mortgage document) given their mortgages to this “all-powerful” monster called Mortgage Electronic Registration Systems, Inc. that has been at the center of foreclosure controversy throughout the United States for the past several years.
7. Since it may not be legally possible for a mortgage to be modified after it has been transferred by Mortgage Electronic Registration Systems, Inc. to a third party (as the so-called “nominee” for the original lender), many homeowners are being further deceived by a host of government-endorsed (but knowingly disingenuous) mortgage modification programs which were, and are, merely “adding insult to injury” as schemes to extract more money out of homeowners under the guise of offering a permanent mortgage modification. These programs, on the whole, have been a failure.
8. Thousands and thousands of “applicants” have learned the hard way that the essence of a “mortgage modification application” is to (a) have the homeowner agree to being totally at fault, (b) extract financial information from the homeowner, (c) extract money from the homeowner while guaranteeing little or nothing, and then (d) ultimately declining the application; all orchestrated under unmercifully delayed and unresponsive processing procedures.
9. The ugly result of these circumstances is that, truth be told, the banks (especially in their capacity as “mortgage servicers”) know that a vast majority of the chains of title related to their mortgage loans are broken, and the preferred approach is simply to foreclose them to “start the chain of title all over again” with a “new” foreclosure deed which serves to erase the effect of the broken chain of title to the given property which, if properly contested and challenged, may very well have made the subject defaulted mortgage one that could not be legally foreclosed.
10. Tragically, both the state and federal regulators, as well as many Courts, are buying into the notion that America should be a “government of the banks, by the banks, for the banks” and not the government originally envisioned by Abraham Lincoln who, in the last section of the Gettysburg address, defined the nation’s task and objective that a “government of the people, by the people, for the people, shall not perish from the earth.”
The bottom line here is that tens of millions of homeowners (many of which are current on their mortgage loans and have no idea that they’ve also been duped) have been victims of intentionally deceptive and unfair trade practices which are illegal, if not criminal, in nature – and the deck is stacked in a manner which makes it all but impossible to do much about it absent very substantial resources to wage a court battle.
In the final analysis, the U.S. foreclosure crisis hardly exemplifies, under any stretch of the imagination, an application of the core principles that provide the foundation for a representative democracy.
Given these circumstances, the question is who is going to stand up and do something about it. Most don’t want to do anything for fear of political or occupational retaliation.