Strategic Mortgage Default: Separate Facts And Opinion

There is much discussion in local and national media about strategic mortgage defaults. Strategic default occurs when a homeowner decides to walk away from an upside down mortgage when the homeowner has the income to pay the mortgage payments. The homeowner decides that it is not in his best financial interest to continue to pay a mortgage on a home with no equity.

Locally, Orlando Sentinel report Beth Kassab has written several articles recently on the topic. She states that to date most banks have not pursued personal deficiency liability on first mortgage foreclosures, but she then quotes an attorney who claims that lenders will increasingly pursue or assign deficiency claims in the future. I have heard many attorney forecast that deficiency actions will become the norm in future years as either banks have more time as foreclosures decrease or as borrowers recover financially as the economy improves.

The national media has also recently run segments on strategic defaults. These are two examples from MSNBC and Fox News, respectively. Most of these reports emphasize the risk of rich people walking away from mortgages and warn against future deficiency judgments.

Maybe some other attorneys or reporters say they know what banks will do next year, but I admit I do not know for sure what actions banks will consider next year, or the year after, to be in their best interest. I cannot predict the future of deficiency claims.

There is a difference between fact and opinion; anyone can have an opinion but individuals are not entitled to their own facts. Fact: up to now few banks have pursued deficiency judgments after first mortgage foreclosures. There are exceptions, but the exceptions are limited. Unless you make lots of money or own many, many properties it is unlikely that your bank will pursue a deficiency judgment on a first mortgage.

My advice to clients is to prepare for the worst but base your business decisions mostly upon what you know has happened to date. I believe a strategic default is better than spending your retirement savings on a hopelessly upside down house. If you deplete your retirement money and savings funding a seriously upside down mortgage you will find yourself with no house and no retirement savings. After all your money is gone, and you need money to retire or for a financial emergency, your mortgage lender will not help you. Homeowners need to protect themselves first- the government will protect their mortgage lender.