Strategic Default - Walking Away From Your Mortgage

Real Estate Agent with John L. Scott MPV 104970

Strategic Default -  Walking Away From Your Mortgage

Walking away from your mortgageRecord numbers of homeowners are walking away from their mortgage. They are doing what's called "Strategic Default" or better known as "walking away from their mortgage". Being a licensed real estate broker, it's not my place to be offering advice to people telling them to walk away from their mortgages. I'd leave that up to the CPAs and real estate attorneys. However, I can totally see why someone might want to consider this option.

I spoke to a buddy of mine the other day who bought a home in 2006 for $250,000. The house is worth probably $160k-$$165k in this market today. This puts him pretty far underwater. Now his situation is that he can certainly still make his payments just fine, however, he doesn't want to anymore. Last year he got transferred to a different office further south which increased his commute time by an extra 45 minutes each way for a total commute time of over 3 hours per day. Under normal circumstances he would consider just selling and buying something closer to his new job location. Unfortunately, since he is able to make his payments and has no documentable hardship, the bank will not consider a short sale unless he comes to the closing table with the $80,000 deficiency. Well who has a spare $80 grand laying around? Not I.

So what's he thinking of doing? He's considering strategic default. Now in many situations this is a horrible idea because you could have a judicial forclosure and be in deep do-do for way more money than just the deficiency. But in Washington State, with deeds of trust, you're facing a non-judicial forclosure at a trustee sale. If you only have ONE mortgage with no 2nd, then this means that they can't come after him for the deficiency if he simply lets them foreclose!

Walking Away From Your MortgageThis is the case for my buddy. He figures he simply will stop making payments, drag the bank along as long as he can while he saves the money he would have spent on it and use it for paying off other debts. In the state of Washington the bank (if they even get the time to get around to it) is required to post the sale notice 90 days before the date of the trustee sale. So at MINIMUM, he gets to save 3 months of payments, walk away from the debt and the deficiency, and become a renter with the worst being that his credit will take a nasty hit for the next 7 years and he will have to rent.

In another scenario, I have a short sale listing in which the names on title are my client and her brother. She had since then gotten married but the husband was never put on title. This one is a bonefied hardship short sale but unfortunately its a middle unit, second floor condo which makes it an insanely difficult one to place with a buyer. What's more is she's more than $100k underwater. We could drop the price but then the bank might not approve and their is always still the chance they could request the seller sign a deficiency note which I know she would never do for that huge amount. If she sells as a short sale, her credit will still be effected, altough not quite as bad. With her unique situation, she could strategic default then still buy a home with a non-government loan and have her husband take title as "married as a separate estate". They could walk away from their mortgage and still be homeowners with a NEW home! Gosh it's almost a no-brainer.

So if the bank made a business decision to give these people loans, do you blame them for considering a strategic default and walking away from their homes as a sound business decision for themselves?

IMPORTANT...Anyone considering walking away from their mortgage payments and doing a strategic default should always consult a real estate attorney and CPA for legal and tax advice, ESPECIALLY if you have more than one loan or live in a state which does judicial forclosures as opposed to trustee sales..

Comments (3)

Jack Mossman - The Nines Team at Keller Williams in Stockton
The Nines Team At Keller Williams - Stockton, CA
The Nines Team at Keller Williams in Stockton

Jeff - Check with your buddy to make sure that his original loan application is straight up ... if there's any fuzzy numbers ... the lender may do more than take the house back! 

Apr 05, 2011 04:53 PM
Angelina Clarke
Builder Services Realty, LLC - Tampa Palms, FL

Sooo it has made it's way to WA???    Florida has become the Wild Wild WEST!!!  Make friends with some bank exec's now :)  It will do you a WORLD of good in the not so distant future :)

Apr 05, 2011 04:55 PM
Terronald Logan
Keller Williams Realty - Austin, TX
Realtor, Homes for Sale - Austin, Texas

You're right Jeff... in many cases, it REALLY DOES make sense for some people to consider strategically defaulting.  And 2012 is going to be the YEAR of the short sale and foreclosure.  Great write-up!


Jan 01, 2012 10:06 AM