Archive for July 31st, 2010

Strategic Default and Depleting Savings / Retirement Accounts

In recent weeks, an increasing number of prospective clients have met with Stopa Law Firm for an initial consultation about foreclosure even though they haven’t missed a mortgage payment.  A few years ago, that would have sounded crazy.  Nowadays, though, millions of Florida homeowners are tired of making payments on a home worth a fraction of what they owe.  Generally, these homeowners fall into two categories – those considering a “strategic default,” i.e. intentionally stopping payments even though they can afford to pay, and those homeowners who can afford to pay but are slowly depleting their savings or retirement accounts to do so.  It’s time that I blog about both scenarios. 

First off, everyone’s situation is different, and it’s hard to make blanket statements in a blog that apply to everyone.  That said, if you’ve been depleting your savings or retirement account(s) to pay your mortgage, then, unless you expect your finances to improve in the near future, it’s probably time that you re-evaluate your situation

For example, suppose you had $70,000 in savings/retirement in July, 2009, but in your ongoing attempt to pay your mortgage (and other necessary expenses), that number is down to $35,000.  If that sounds like you, then the first question I’d ask is this:

Do you expect your situation to improve in the near future? 

If the answer is “no,” and you’re going to continue depleting your savings/retirement at a rate of roughly $35,000 per year, then my next question would be:

What are you going to do when your savings/retirement runs out? 

Many smart, hard-working, well-intentioned clients have no answer to this question.  For most people, there is no answer.  What can you do when you run out of money and can’t pay your mortgage?  The next question I’d ask is:

Would it be better to stop paying your mortgage, and face a foreclosure lawsuit, now, with $35,000 in your pocket, or to continue paying your mortgage for another year, run out of money, and then face foreclosure? 

For most people, the answer to this question is clear.  I mean, if you’re going to (possibly) get foreclosed, isn’t it better to do so with $35,000 than with zero?  Heck, for that matter, wouldn’t it have been better to do so with that original $70,000?  Generally, the way I’d characterize it is this: 

if you realize a foreclosure lawsuit is inevitable, and it’s just a matter of when (not if) it comes, it may be better to stop paying your mortgage now, and face the problem sooner, with money in your pocket, rather than later, with no money in your pocket. 

After all, if you choose to give all the money to the bank in the future, you certainly can, but if you give the bank all your money and then get foreclosed, you’re never going to get that money back. 

At Stopa Law Firm, we’ve been giving advice like this for a long time.  In fact, I was in the news with this as far back as October, 2009 – here.  (While I don’t agree with everything that reporter wrote in that story, the point is clear – for some people, stopping payments is the right option.)  Anyway, now that Stopa Law Firm has hundreds of clients, I can’t tell you how many homeowners are thrilled with their decision to stop paying, save their money, and defend their foreclosure.  In fact, many clients have told us they wish they had stopped paying sooner.  Does that mean everyone should stop paying?  Of course not.  But:

if you realize you’re slowly depleting your savings, and you’re going to soon be out of money, what are you supposed to do – give your last dime to the bank and then get sued for foreclosure anyway? 

If you can accept the premise that some people should stop paying, the logical question becomes “why shouldn’t everyone?”  Many Florida homeowners are, in fact, considering a “strategic default” – intentionally withholding mortgage payments even though they can afford to pay because their house is worth so much less than what they owe.  The rationale is clear: 

Why pay $250,000 for something worth $150,000?  

At the outset, let me be clear.  Nothing in this blog is intended to encourage anyone to stop paying on their mortgage, particularly if they can afford to do so.  The decision to strategically default is complicated and must be evaluated on a case-by-case basis.

That said, I can totally understand if, after consultation with an attorney, a homeowner were to make the conscious decision to withhold mortgage payments on a home worth $150,000 with a mortgage balance of $250,000. For many homeowners, this is a perfectly leigitmate business decision. 

Contrary to what the banks want you to believe, there’s nothing immoral, unethical, or slimy about a strategic default.  A strategic default is, quite simply, a business decision – no different than those made by the banks every day.  Some people may disagree, but it’s not my job to enforce someone else’s version of morality – it’s my job to represent Florida homeowners. 

If you’re wrestling with the ethics of strategic default, consider two real-world world comparisons – one big, one small. 

First, suppose you buy a new, two-year cellphone plan with unlimited minutes, 24/7/365, for $100/month.  In so doing, you’re entering a contract, “promising” to pay $100/month for two years.  Now suppose in two months, a different cellphone provider offers the same plan for $50/month.  If you could get out of the first contract by paying a $200 cancellation fee, wouldn’t it make sense to do so, even though you’d be going back on your “promise”?  I think so, and I suspect most people would agree.  (After all, you’d have saved the $200 cancellation fee after four months with the new plan and every month thereafter would entail $50/month in your pocket.)  A situation like that is not driven by ethics or morality – you’re making a business decision – doing what’s best from a financial perspective.  How is that wrong?

If that example is too simplistic for you, let’s look at a big-business example of “strategic default” transpiring now, right in our own backyard.  The Tampa Bay Rays play their home games at Tropicana Field in downtown St. Petersburg.  They have a contract with the City of St. Petersburg to remain at that stadium through 2027.  The Rays owners, though, are frustrated with low attendance rates and want the team to move to Tampa.  (Anyone who knows the Tampa/St. Pete area knows the best place for a stadium would be in western Tampa – near where Stopa Law Firm has its Tampa office, actually, and not downtown St. Pete).  Moving to Tampa, though, would breach the Rays’ agreement with the City of St. Pete.

Gee, does this sound familiar?  A decision about whether to breach a contract for business purposes … that’s precisely the situation so many Florida homeowners are facing.  What’s fascinating to me, though, is that when the media talks about the Rays, it does so purely from a business perspective, yet when the same discussion is about homeowners, morality somehow enters the picture.  Why?  I realize some homeowners have a sentimental attachment to their home, and that’s their prerogative.  Aside from that, though, I see no reason why strategic default should not be viewed any differently than the cellphone example or the Rays’ stadium example.  The decision to initiate a strategic default is complicated, yes, but if it makes sense from a business perspective, why not?  That’s why I’d be shocked if the Rays are still in St. Pete as of 2027 – once the business dynamics get this awry, something has to give. 

For an interesting take on strategic default, check out this well-written article.

It’s unfortunate that our society is at the point where homeowners must decide whether to stop paying on a mortgage, whether it’s because they are slowly depleting their savings or owe more than the house is worth (or both).  That said, when banks took billions of dollars in bailout money, they did what was in their own best interests (by putting the money in their pockets and not giving loan modifications as was intended).  With that in mind, the question for me becomes:

If the banks can do what’s in their best interests, why can’t homeowners? 

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