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?
Posted in Main | 39 Comments »
Excellent post. I’m happy to hear that homeowners are looking at this from a business standpoint and not an emotional one. This is common sense advice but few people are brave enough to talk about it openly.
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I am currently facilitating a portfolio of a little over 200 short sales all of them are in different stages of the short sale process and a little over 90% of them are located in the Phoenix, Scottsdale, Arizona area.
Most of my strategic defaults are homes with prices points over 1MM. Reason being, if you make a significant amount of money and you just lost 50% of the equity your home was had in the period of 3 years, you are going to think about how much sense it makes to continue making your 7K+ payment each month. A homeowner who just lost that much equity is also going to begin thinking about how long will it really take to get that equity back? 20 years? 30 years? With historical appreciation rates of between 3%-4% each year it could take quite a while. Now here is the BIG IF. If you purchase during the Boom of 2005 or around then, will you ever even see price get that high again? Lets face it, prices were extremely inflated.
With all that being said, that is what is going through a person’s mind who can afford their mortgage but have lost so much equity that it doesn’t make sense for them to continue throwing good money after bad especially if they have cash to buy a new home again or can rent for half the price. Also, much like University of Arizona Law Professor Brent T. White, I am shocked that more underwater homeowners in Arizona are not pursuing short sales!
Arizona Anti-Deficiency Statues protect most homeowners who have purchase money loans only. That means that the bank cannot pursue you for the deficient balance owed if you get foreclosed on.
I believe the strategic default wave is coming and I don’t blame them. This will cripple the Arizona real estate market for decades if not the nations.
I have a bunch of postings on my site (www.smithavenue.com) regarding this very topic. I hope you have time to stop by and read them as they will also give you more of an in-depth idea of the homeowners and clients that I assist in the pursuit to avoid foreclosure.
Thanks again!
Chris Lopez
Principal, Smith Avenue Assets
9500 E. Ironwood Square Drive ste. 101
Scottsdale, AZ 85258
480.398.0909 – DIRECT
480.223.6443 – FAX
[email protected]
http://www.smithavenue.com
I can’t feel that you blogged about this subject. Not as well many people today understand the importance of these sorts of things
I agree 100%
– Mara ALARCON
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– Carlie COBLE
Real clean website , regards for this post.
I have tried for 4 years to negotiate with the servicer on my mortgage. Initially I asked them to waive the pre-pay penalty so I could sell the house without having to pay to do so. I was denied on the basis that the pre-pay penalty was 3 years at 3.5%. in 2007 the property values fell so drastically that I again asked my lender to recast the note and lock in the rate, since they had put me into a flex pay mortgage which I was not informed of until I noticed the principle increasing when I made what I thought was the required mortgage payment. They refused telling me I would have to requalify and based on my current working situation, being 1099 my income would not support the refinance, plus all the fees added on to a mortgage that was already higher than the value of the house.
In September of 2010 after almost depleting my savings and 401K. I again approached the servicer firstly requesting they produce the note, since in looking over my loan package, I had not been given one single copy of any document I supposedly had signed. All the documents were blank. They replied telling me I would need to submit a total of $185.00 for them to produce a note that I should have been given at signing. I refused. In october I received along with this letter requesting payment, a letter from the servicer, telling me my interest rate had dropped to 3.5% from 4.25% and the index had been reduced by half, yet my mortgage payment had increased by $115 per month! Immediately I called them assuming there had been a mathematical error. I was informed they had recast the note (as the docs which I don’t have indicate it can be done every 5 yeears) and shortened the term in order in increase the payment thereby increasing profitablility! I was completely outraged. I’m 60 years old and struggling to make a payment as it is and in reality I am no longer in any type of good health to maintain their property. Up to that point, I was current. I informed them I would no longer be making any payments as I had recast my budget and it was no longer financially feasible for me to be paying them for the privilege of maintaining their property. Henceforth, they could pay ME to maintain it or it could simply fall into disarray. I had been postponing moving back to Canada to take care of my aging mother and a sister who is terminal in the effort to take care of this house. Now I am moving back to Canada, I’ve rented the house, and I’ve strategically defaulted on my mortgage. I can see no reason for me to use the last few dollars of my savings after having depleted my retirement, in order to satisfy a bank that cannot and will not produce the note, has placed me in a mortgage that is impossible to maintain and illegal, and continue to pay for a property that by the preplanned ponzi scheme perpetrated by the banks, is continually decreasing in value.
I will need an attorney I am sure, and I will certainly call on Mark for this service. I am impressed! It is refreshing to see there are attorneys out there who truly defend and represent their clients and expect the letter of the law ot be adhered too.
Thank you for this blog..I will be calling your office on monday!
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hello thanks for the info.
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Very well written story. It will be supportive to anyone who utilizes it, including myself. Keep doing what you are doing – looking forward to more posts.
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Wow! This really is 1 of the most beneficial blogs I’ve ever occur across on this subject. Merely Amazing
About 4 years ago the federal government said I live in a flood zone(there has never been a flood here), the bank now says the federal flood insurance is not enough so they put us with a private insurance group; my homeowners insurance has gone up even though the value of the house has dropped by 1/3; the bank now has increased the escroe needed to cover the cost of insurance; my mortage over the past 5 years has increased from 1300 to 1750. I’ve had it. I am thinking of doing a foreclosure. I am 30K underwater, my payment has increased almost 500 a month and I will never live in this house long enough to break even. I have a good amount in my 401k and will just pay cash for a new house when I retire in 3-4 years. Does it make sense to continue to pay this monthly amount or should I try and negotiate a new loan with the bank. I don’t trust them, the government, or the insurance corporations anymore. If I try and refinace, they want to know how much is in my 401k plan. My fear is they will get this information, deny a new loan, then go after the money that I have in the 401k plan. I don’t know what to do.
I strongly urge you to keep your 401(k) money. Even if you have to file bankruptcy, you can keep your 401(k) money. Even if you get judgments against you (e.g. deficiency judgments), you can keep your 401(k) money. Feel free to call for a free consult. 888-450-1549
I’ve lived in my condo for 4 years. We purchased it for $140,000 in 2007. It’s now worth $40,000-$50,000. We have no problem paying the mortgage but we are starting to hate the area and want to make a move. We can’t refinance because we are inderwater. If we rent we will only be able to get $600-$700 a month (if we are lucky) Our mortgage is $948 a month and $215 in HOA fees. We would be losing almost $500 a month for a house we don’t even want anymore. We are thinking of doing a short sale but worried we may not be considered a “hardship”. My husband lost is job last year and is now making half of what he used to. On the flip side I’m making double so we have broken even. Any suggestions on how we can avoid drowning?
You may be a candidate for “strategic default.” This is where a homeowner can afford to make the monthly mortgage payment but, for strategic reasons, chooses not to do so. Here, for instance, if you could get the bank to take back the condo as full payment, waiving the deficiency, you’d be eliminating a liability of about $100,000 (the difference between what you owe and what the house is worth).
Depending on who signed the Note, bankruptcy may also be an option, too, if not for you then your husband.
Feel free to set up a consultation and we can discuss these issues further. 888-450-1549.
Does Florida have a anti-deficency law?
No. Yet another reason to hire an attorney and defend your foreclosure lawsuit.
Hello. I just stubled upon your site, and I am impressed. I have been trying to deal with my lender for 2 years now on a modification. I lost my job 4 years ago, and ahave been struggling since. I did get another job, kept my mortgage current for the first 2 years, then 2 years ago, when my mortgage was more than I made, stopped paying and applied for help. Well, having lost that job 2 weeks ago, the lender just let me know last night that I now was not qualified for modification, and they would be foreclosing. They told me to try to sell, but properties here are listing for less than half of what I owe. They also told me that I would be receiving a 1099 from them for the difference in what it sells for and what I owe. I am at my wits end now. For the past 2 years thay could have done something, and now its too late! I’m really not sure what to do at this point. I am 62 years old, and having a really hard time in the job market. So I walk away and take my chances or stay till they knock on the door. Any advise would help! I appreciate the information I have gotten through your site, and if an attorney is necessary, and I can afford it, I will contact you. Thank you. I’m pretty desperate!
Call us for a free consultation. 888-450-1549. We’ll be happy to help.
I am a 70 year old that is beyond stupid, we purchased a Orlando area Time Share 3 years ago, havent used it, probably won’t, and have other finacial concerns just keeping afloat. We are considering a strategic default on it. I had asked for a mortgage adjustment from our 13.9% interest rate and they sent me a refinance application for 10.4% and $1,500 closing costs. I was stupid but I did learn enough to walk away from that. What types of problems might I expect going forward with a default.
Call us for a free consult. We’ll be happy to help. 888-450-1549
Mark
I’m at the beginning of my search for help. My husband and I made a lot of mistakes in 2005/2006. We purchased 5 acres of property for $124,000 that is now worth almost nothing. Then we purchased an existing home for $310,000 that is now worth less than half that. We had stupidly assumed that we could sell the land, and the old house easily because at that time, property and homes were selling like hotcakes. Well, that wasn’t the case for us. It seems that the minute we signed on the dotted line, the economy collapsed and we were doomed. We’ve been making payments on all of this. We have 15 year old cars that we can’t afford to get repaired. We never, ever go anywhere or have any fun going out to restaurants, etc. This has been terrible for our children and our life. Now, I’ve found out that I have cancer, and even though our insurance covers a good deal, it will still cost us thousands. If we don’t pay that….. then I will die. I’m 54 years old. My husband is older than I am and is having a difficult time with physically being able to continue his job. Neither of us sleep at night. He won’t discuss it. We don’t make very much money in the first place. I have no idea what to do. Any advice would be helpful.
If you’ve been reading my blogs, and it looks like you have, then I think you know what you have to do. It’s not an easy decision, but it seems like a must, no?
We’ll be happy to discuss this with you in more detail. Call for a free consult. 888-450-1549.
I am a Florida resident, owing a home in Jacksonville, but I purchased a home in Georgia three years ago. The home in GA I invested about $312,000 total including the land valued at about $50,000. The home down the street is now in foreclosure and is short selling for about 129,000. I still owe a mortgage of $260,000 on the home in Georgia. My question is, if I default, will they do a deficiency judgment against me and what property in Florida is in danger. I own my home here (homestead) and my IRA accounts. I have another place in Florida I own free and clear. Can they put a lien against all my other property in Florida? Can they garnish my pension check and my wife and my social security? What is my best plan for a defense? I cannot afford to pay the mortgage without depleting our retirement savings. I could offer to give them title,but we are about $100,000 underwater. Is there any thing I can do?
I am not licensed in Georgia, so I can’t comment on the Georgia aspects of this. What I can say is this…
Your Florida homestead is protected, even if you are foreclosed in Georgia and have a deficiency judgment entered against you. IRAs, pension plans, and SS benefits are generally protected as well. This is why, as I wrote in the blog, it’s not a good idea to deplete these monies to pay a mortgage – you’re taking monies the bank cannot touch, no matter what, and giving them to the bank.
My concern is about home you call “another place” in Florida that you own free and clear. That home could be subject to execution if the bank obtains a foreclosure and deficiency judgment against you (presuming the laws on deficiency judgments are the same in Georgia as they are in Florida, which, as I indicated, I’m not in a position to discuss).
Feel free to call us for a free consultation – we’ll be happy to discuss strategy with you. 888-450-1549
Amazing website, thank you. As Mark states, I am in my house now free 2 yrs next month. I strategically defaulted after a year trying for a modification, with a fico of 774 so I could afford 500 per mo therapy for my disabled daughter….about the excess fees Citi increased me on my 30 yr fixed within 9 months of closing…likely to cause me to default. After being so type A with my credit rating and suffering a slight stroke calling the bank twice weekly for months about a modification they never intended to give, I decided my health was far more important than my credit rating. I have saved significantly, although I was also just laid off from my engineering job so I have to build up my appraising business again, when that market is still so soft. I intend to buy a FLorida house for cash (moving there soon from MD) and place it into a trust for protection. I am teaching my children never, never to mortgage the house. Pay it off, place it in a protective entity and never refinance. Every time we do that, we give all the equity to the banksters. I just filed ch 13 to forestall the 2nd attempted foreclosure sale…even though I have a 46 page document proving their fraud, forgeries and felonies with my loan. Unfortunately, our judiciary is owned by the Federal Reserve (since 1938) when we became a debtor nation, just a short 20 yrs after the passage of the Fed Reserve Act. That is why homeowners are not winning in record numbers. The judiciary for the most part is owned by the banksters. Have been considering converting my 13 to a 7, much of this is to buy, stall for more time to mount my defense in a countersuit. Reading this site makes me feel more comfortable about this. Mark, if you know a MD licensed colleague (please email me) who will go for the balls, I have a superior fraud, forgery, felony claim notice (from a Scottsdale attorney) and 2 of my 3 forensic / SEC auditors are prepared to be expert witnesses. So you see, I have been using my saved money to force civil discipline because our country desperately needs bank reform. They are about to collapse the dollar and if you think gas and bread are high now….better save up friends. Listen to Porter Stansberry on Alex Jones and get prepared: http://www.youtube.com/watch?v=3BioK9LDppg
Is it possible to do a “strategic default” if the second mortgage is an equity line. The recent housing depreciations have created an underwater situation, but only in regard to the equity line used to significantly improve the property.
It’s the same concept, yes. And you may have more success getting a deficiency waiver or even a principal reduction on a second mortgage, as often the second mortgage company realizes they’re second in line, so it gives them incentive to negotiate when they otherwise don’t.
I have a mortgage equity loan that originated with Wachovia and is now with Wells Fargo. It is not a second mortgage. The loan is for 105,000 and my house is worth maybe 65,000. It is an older home, built in 1926, and not getting any younger. What are my options?
Well, if you’ve read this blog, your options should be clear. But we’ll be happy to discuss things with more specificity during a free consultation. 888-450-1549
I am 61, my wife is 63. I was in the building material supply business for almost 20 years and was laid off in ’08. I was unemployed for two years; working now but making $10.75 per hour vs $34 per hour in my past life. Wife making 15K less than what she was making two years ago. I purchased my condo for $283K in ’05, currently owe $209K. The condos in my complex are now selling for 85K to 90K . We stopped making mortage payments in Nov. 10 and except for several taped phone messages a week we have heard nothing from our mortage holder. I did speak with a rep. of the bank once, their first phone call to us after we stopped payment, and explained what we were doing and why. We are staying current with all other debts.
Within the past few months my wife’s mom, who is in assisted living, Quit Claimed her condo (in the same complex) to my wife so we have a place to live when the bank finally forcloses on our unit. That condo is payed for. Since that condo is now in my wife’s name can the bank take that condo if they obtain a deficiency judgment against us?
Yes, but not if declare that condo your homestead first.
I live in New york(homestead) and have a rental property in polk county FL since 2006.
I am underwater with this property(FL)-about $180,000, and have been depleting my assets to just to pay the mortgage. I would consider doing a short sale(and stop my payments) but have concerns about the “what if’s”. What if the bank does not approve the short sale and starts the foreclosure process. Am I federally protected from the bank coming after my assets. We have Roth IRAs, and my NY home has very little equity in it. I am disabled and collect disability income(private and workers comp), my wife works part time at 2 jobs. Can they claim our Roth IRA’s, put a lien on our NY home, garnish my disability income and/or my wifes wages? The definitive answers to these questions will help me to move foward. Mark, can you help us?
Thank you.
David,
IRAs are exempt from execution. The only way you lose IRA money is if you remove it voluntarily.
Mark
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