SUMMARY: Millions of American homeowners are walking away from underwater mortgages, utilizing the process of strategic default. If you're considering taking this step, even though you have the money to continue paying, you should prepare yourself to sit down to a game of "poker" with the bank. Assuming you have a recourse loan, you need to successfully bluff the bank into believing you cannot and will not pay, even though you face the threat of the bank suing you for a deficiency judgment on the balance of the loan.
Strategic default is the financial decision to "walk away" from your underwater mortgage, even if you have the money to continue paying it. Many homeowners and investors are taking this step right now, and even more are considering it. The goal is to rid yourself of the problem mortgage without paying any more cash out of pocket, while simultaneously having the bank agree not to pursue you for a deficiency judgment to cover the unpaid portion of the loan.
Once you stop paying your mortgage, you've effectively sat down to a poker game with the bank. You have assets, so you are genuinely taking a risk that the bank might come after your life savings to get what it is owed. You are betting that the lender won't try to prosecute you to the very ends of the law in an attempt to get every last dime it can out of you. In recourse situations, they pretty much could if they wanted to. But it might not be worth it to them, both because of the time and expense involved, and because of the massive volume of bad loans they are already dealing with. Can they really go after EVERYONE??
My personal experience, the experience of many people I know, and careful analysis of the financial news, have shown me that to date in this real estate crisis, the banks seem to be bluffing less than the borrowers in this high stakes game of poker.
They can certainly threaten to sue you and get a deficiency judgment, and of course in some cases they are following through on that bluff. But it is just not practical for them to do this with too many borrowers. They need to get these bad loans off the books, minimizing their losses in the process. Hence they have been in a fairly forgiving mood for defaulting borrowers who make it easy for them to agree to an alternative solution such as a short sale.
The banks also know that the courts are overwhelmed by the volume of foreclosure suits and other similar matters being brought in front of them. Hence it is likely to be several years before a deficiency lawsuit would reach trial, if ever. Considering the legal expense and the time involved, even if it could win the lawsuit (not always easy to do), the bank might decide that agreeing to a workout with you for a dollar today might be worth more to them than the possibility of two dollars to be received three years from now.
I want you to be crystal clear that there are no guarantees in strategic default, and if you have a recourse loan, you are taking a risk on an uncertain outcome. But if you build the best hand you can and get the odds in your favor, then just like the poker stars you see on television, you can give yourself a good chance of coming out on top against your opponent - the bank.
Some of the aspects of your situation that contribute to the strength/weakness of your poker hand include:
* The absolute size of your loan - is it large enough to be worth the bank's while to come after you?
* The size of your asset pile, relative to the amount you owe;
* How far underwater the loan is;
* How good a hardship letter you can write to justify your non-payment;
* The experiences of other people in similar situations in your locale - were they able to complete the process with no liability remaining?
In order to decide whether strategic default is right for your underwater mortgage, you must first get a clear picture of what kind of poker hand you can assemble before you sit down at the table across from the bank. Once you understand your cards, you can evaluate the rest of the variables and make a decision on whether to walk away.
Strategic default is the financial decision to "walk away" from your underwater mortgage, even if you have the money to continue paying it. Many homeowners and investors are taking this step right now, and even more are considering it. The goal is to rid yourself of the problem mortgage without paying any more cash out of pocket, while simultaneously having the bank agree not to pursue you for a deficiency judgment to cover the unpaid portion of the loan.
Once you stop paying your mortgage, you've effectively sat down to a poker game with the bank. You have assets, so you are genuinely taking a risk that the bank might come after your life savings to get what it is owed. You are betting that the lender won't try to prosecute you to the very ends of the law in an attempt to get every last dime it can out of you. In recourse situations, they pretty much could if they wanted to. But it might not be worth it to them, both because of the time and expense involved, and because of the massive volume of bad loans they are already dealing with. Can they really go after EVERYONE??
My personal experience, the experience of many people I know, and careful analysis of the financial news, have shown me that to date in this real estate crisis, the banks seem to be bluffing less than the borrowers in this high stakes game of poker.
They can certainly threaten to sue you and get a deficiency judgment, and of course in some cases they are following through on that bluff. But it is just not practical for them to do this with too many borrowers. They need to get these bad loans off the books, minimizing their losses in the process. Hence they have been in a fairly forgiving mood for defaulting borrowers who make it easy for them to agree to an alternative solution such as a short sale.
The banks also know that the courts are overwhelmed by the volume of foreclosure suits and other similar matters being brought in front of them. Hence it is likely to be several years before a deficiency lawsuit would reach trial, if ever. Considering the legal expense and the time involved, even if it could win the lawsuit (not always easy to do), the bank might decide that agreeing to a workout with you for a dollar today might be worth more to them than the possibility of two dollars to be received three years from now.
I want you to be crystal clear that there are no guarantees in strategic default, and if you have a recourse loan, you are taking a risk on an uncertain outcome. But if you build the best hand you can and get the odds in your favor, then just like the poker stars you see on television, you can give yourself a good chance of coming out on top against your opponent - the bank.
Some of the aspects of your situation that contribute to the strength/weakness of your poker hand include:
* The absolute size of your loan - is it large enough to be worth the bank's while to come after you?
* The size of your asset pile, relative to the amount you owe;
* How far underwater the loan is;
* How good a hardship letter you can write to justify your non-payment;
* The experiences of other people in similar situations in your locale - were they able to complete the process with no liability remaining?
In order to decide whether strategic default is right for your underwater mortgage, you must first get a clear picture of what kind of poker hand you can assemble before you sit down at the table across from the bank. Once you understand your cards, you can evaluate the rest of the variables and make a decision on whether to walk away.
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