Putting the Strategy in Strategic Default
I want to share John McConnin's blog about list for Strategic Default considerations.
A Strategic Default may not be very Strategic if you have not created what we call an upside down analysis (tm).
Now that Fannie Mae and other lenders are pursuing deficiency judgments it should be clear to most people that it is important to Put the Strategy in Strategic Default (Tm).
Checklist of Strategic Default considerations
1. Release from the remaining loan balance.
a. Read your loan to see if it is a non recourse loan -- it is rare to find a loan which says it is non recourse on it face… but I have seen two.
b. see if you are protected from the deficiency by operation of state law.
(i) In some western states like CA, some loans become “non recourse” (to the borrower) after a foreclosure. Other loans in carry personal recourse after a foreclosure. (Note: CA has recourse and non recourse loans.)
(ii) other states like FL do not have laws which operate to automatically protect the consumers from personal liability after a foreclosure… so states like Florida a so called “strategic default” runs a high risk of not being strategic.
2. Does your lender offer workout options which are useful?
a. will your lender or loan servicer release the deficiency in writing as part of a short sale? Or are there other financial reasons to attempt to negotiate a short sale?
b. will the lender release the deficiency in writing as part of a deed in lieu?... the tough part of negotiating a DIL is getting the lender to accept the offer.
c. is there a short payoff or short refi option which exists outside of a short sale? … there are lots of people hyping short refis—but the funny thing is some of the hype-sters have come to us to see how we get short pays accepted. (we are very selective about the loans and the lenders). So far I have not seen a single short reifi hypester produce a single result on the residential side in a liquid market.
Note… our commercial real estate group has closed commercial refinance’s on commercial properties. In commercial deals, if you can show you have closed multi million dollars deals, the investor does not typically care if you allow the borrower to stay in possession. I am open mined to the idea on the residential side, but so far all I have seen is hype.
d. Other workout options to consider.
3. Is your default part of Bankruptcy planning? Please note Bankruptcy is no nearly as useful as it once was for most people with average or better jobs or other assets
4. Credit rebuilding and repair consequences.
Many people are finding out that poorly executed short sales can leave them with an open unpaid debts. In some circumstances a foreclosure might be better than and open line of credit.
5. Preservation of Asset or Salary Info . If you have recourse loans you might decide it is too risky to give updated asset or salary info to your lender. Remember you may have already given your lender substantial info when you took out the loans. Sometime our clients decide that although a foreclosure will stick them with a deficiency for the junior loan, it is better to not let that lender or senior lender know about their recent income or asset acquistions.
6. Choice of Collection Company. With some lenders it is sometime beneficial to deal with their likely collection arms. With other lenders it is much better to deal with the servicing arm of the lender.It is important to know with whom you may be negotiating.
This list is not complete… feel free to add the strategic considerations which go into a strategic default.
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