Strategic Default - The Risk and Reward of Walking Away

By  Paul Stevenson

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 term "walking away" makes it sound simple. Unfortunately, strategic default is anything but simple, and it is definitely not without risk. Many (but not all (i)) mortgages dictate that if you default and the bank does not receive the full amount owed, you are liable for the amount of the deficiency (shortfall). If the property is underwater, you can be certain that there WILL be a deficiency.

For example, say you walk away on a $200,000 mortgage balance and the bank forecloses. If it then sells the property for $125,000, you still owe $75,000 - and in many cases the bank could pursue you in a lawsuit for payment of this deficiency. The reality is that in the current real estate collapse such lawsuits do not appear to be happening very often, because the banks - and the courts - are so overwhelmed with underwater mortgage cases already. There simply is not enough bandwidth for banks to "go after" everyone who walks away. The Goal of Strategic Default If you choose strategic default, your goal is twofold: you want to dispose of the underwater property while at the same time protecting your other assets from being pursued by the bank to cover the deficiency. In this two part objective, walking away and disposing of the property is the easy part - whether it is a short sale, a deed in lieu of foreclosure, or a foreclosure, you CAN get rid of the property. The hard part is evaluating the risk to your other assets, and that is where you must clearly evaluate the entire situation you face.

While it is certainly possible that a snap decision to stop paying and walk away could work out in your favor, if you have other assets to worry about, it pays to be as careful and rational as you can in making the decision for strategic default. The Risk and Reward of Strategic Default Borrowers who choose strategic default are effectively making a bet on the willingness of the bank to sue them for deficiency. They are betting that the bank would rather get the bad loan off the books, get as much cash as they can to cover it, and then be done with the borrower. A well-prepared strategic defaulter is likely evaluating the decision on whether to make the bet based on a number of questions, including:

* How important is disposing of this property to my financial future? And to my emotional future? (If the situation is causing me major emotional distress, which it is for so many.)

* Do I have a lot of other assets, making me look like an attractive target for the bank to single out and pursue for a deficiency judgment?

* How big is the mortgage and how far underwater am I? i.e., does the size of the bank's expected loss make me a "big fish" in their loan portfolio and worth pursuing for a deficiency judgment, or am I small enough not to be worth their time and legal expense?

* How bad is the real estate market in my area? Are the courts already so jammed with foreclosure and deficiency cases that the bank realizes it will be years and a lot of legal bills before they even have a chance to get a deficiency judgment against me?

* Can I make a good hardship case for why I am walking away, thus either convincing the bank to simply let me go, or at least making it realize that a sympathetic court is likely to rule in my favor against "the big bad bank" if they pursue me?

If you are wondering whether strategic default is appropriate for your underwater mortgage, you are right to be asking questions and getting a clear idea of what the risks are. There is no single answer regarding strategic default, but if you understand the risks you face, you can make the best decision for your unique situation. Be sure to gain this clarity BEFORE you stop paying your mortgage. (i) - If your mortgage is in "non-recourse" state, you may not be liable for a deficiency.

Paul Stevenson is an expert on strategic default and the creator of the Strategic Mortgage Default System http://www.strategicloandefault.com. This acclaimed program provides a clear, concise, and comprehensive analysis of the risks and rewards of strategic default, helping underwater homeowners and investors determine if strategic default is the right choice for their situation. Paul Stevenson's work is dedicated to teaching


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