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Strategic Defaults and Foreclosure

Written by Attorney Michael T. Chulak

Q. What is a strategic default?
A. While many people face the foreclosure of their property by a mortgage lender because they are in financial distress, a strategic default involves an affirmative or intentional decision by an owner / borrower to stop making payments on a real estate loan despite having the financial ability to make the payments.
Q. How common are strategic defaults?
A. Not all areas of the county are identical, but in Los Angeles County and Ventura County, approximately 35% of all residential foreclosures are the result of a strategic default.
Q. Why do most strategic defaults take place?
A. It's almost always the result of the following factors:
The fair market value of the property has plunged due to no fault of the owners,
The property owners have concluded that they have no equity and will develop no equity in the near future,
The mortgage lender is not agreeable to a reduction in the principal balance of the loan, and
After a financial and legal analysis, the owners conclude they would be better off financially by ceasing to make any more payments to the mortgage lender and county tax collector.
Q. Is a strategic default helpful or harmful to obtaining a loan modification?
A. Loan modifications are relatively easy to obtain if you have sufficient income to service the debt, no equity, and will be satisfied with a minor reduction in your monthly payments. However, it is nearly impossible to obtain a substantial principal reduction without a strategic default.
Q. If we stop making payments on our mortgage loan, how long do we have before we must move out?
A. This is not an easy answer to provide because lenders have different policies for dealing with delinquencies and lenders find themselves in differing situations. In California, most lenders will file with the County Recorders Office a Notice of Default within 2 to 3 months of the first payment being missed. It then takes approximately 4 months to foreclose if the mortgage lender wants to own the property as soon as possible. A well timed bankruptcy filing will delay most foreclosures about 2 more months. After a foreclosure, if the mortgage lender is required to evict the former owners, it will take nearly 2 more months on average for the lender to acquire possession. These time periods are average time periods based on our knowledge and experience. Some foreclosures take considerably more time because the lender is disorganized, overwhelmed with foreclosures, or has decided it doesn't want another foreclosed property in your neighborhood yet.
Q. Is a strategic foreclosure the right thing to do?
A. Right for whom? If you want to do what is best for you and your loved ones - yes. If you want to do what is best for your mortgage lender - no. We believe your duty is to do what is best for you and your loved ones. You can be certain that your mortgage lender will do what they think is best for their stockholders. You can also be certain they will not place your interests ahead of their own. They have no duty to do so and you would be foolish to expect them to increase their loss in order to benefit you. Do not worry about Bank of America, Wells Fargo Bank, Citi, Chase, or any other mortgage lender. They will protect themselves and, likewise, you should protect yourself and your loved ones.

When you obtained your mortgage loan, presumably you had sufficient equity in the property to satisfy the lender that it was making a safe loan. Equity was put at risk when you gave the mortgage lender your property as collateral for the loan. If you defaulted, the lender could foreclose and your equity would protect the lender against a loss. While neither you nor the mortgage lender expected this to happen, that was the agreement. You took a risk that something could happen resulting in the loss of your equity. The lender also took a risk that the value of the property securing their loan could decline in value and they could sustain a loss. Due to no fault on your part and no fault on the part of your lender, the value of the property has declined placing both parties at risk. Very simply, you must decide whether to use your other assets and / or income to bail out your mortgage lender. We believe you should do what is in your best interest just as the lender will do what is in its best interest. Think of your loved ones - think about your future. Obtain the advice of an experienced real estate attorney.
Q. What is a group strategic default?
A. This refers to a group of two or more borrowers in the same neighborhood with the same lender, working together, to use strategic defaults to obtain favorable loan modifications that include meaningful principal reductions. Often, we find that a particular mortgage lender has made many loans within a neighborhood and that several are in default simultaneously. The lender knows that one foreclosure will effect the value of the other properties that serve as collateral for their loans. This is a fact that is considered when making the decision when to foreclose or whether a loan modification should be offered and on what terms. If two or more borrowers are working together with any experienced attorney, they have added leverage or negotiating strength in dealing with the mortgage lender. A group strategic default can be a powerful tool.
Q. Will a strategic default result in harm to our credit score?
A. Yes. Late payments, a recorded Notice of Default, and a foreclosure will appear on your credit report for 7 years and will effect your credit score on a declining basis over a seven year period. The negative consequence diminish substantially after the first 2 years.

While your credit score is important, you must balance the negative consequences against the following possible benefits:
Saving your pension fund for retirement,
Saving your cash savings for your children's education,
Saving your cash and income to purchase another home at the current lower price / value, and
Trading your high cost of housing for a lower cost of housing.

Call attorney Michael T. Chulak at 818-991-9019 or 800-565-2232 for a no cost initial consultation regarding any legal matter.






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