The Power of Strategic Default
Strategic Default is one of the most talked about Foreclosure Options and involves skipping mortgage payments that you can otherwise afford as part of a plan to avoid foreclosure and improve your finances through reduced or eliminated payments.
Strategic Default is the single most powerful tool available to homeowners in the fight against foreclosure. In reality, even the people who can supposedly “afford” monthly payments often do so by eliminating other basic items like health insurance and quality food. By lowering monthly mortgage payments, the savings can be applied to everything from home improvement to college tuition thereby stimulating the economy and enhancing education and creativity for your children. See Our Recent Post “How Strategic Default Works”
The idea behind Strategic Default is simple — it’s a pro-active way of showing the bank that you’re willing to fight for what you’re entitled to. By declaring Strategic Default, you take control of the Foreclosure Process and help steer the outcome to something beneficial for you rather than letting the bank decide if and when they’ll pursue foreclosure. They may end up making those decisions anyway, but at least you’ll be in a better position to negotiate.
Is Strategic Default is Right For You?
Strategic Default is not a stand alone foreclosure solution but a tool to help you get a Foreclosure Loan Modification or sell your home through a Short Sale. It can also be used to buy additional time while you’re working with the lender, but make sure to avoid a false sense of security that your home is protected while awaiting final approval, cuz it ain’t unless you’re careful!
Regardless of whether you’re pursuing a Short Sale or Loan Modification, confirming that you have an Underwater Mortgage will help both you and the bank better understand your overall financial circumstances. How much the loan exceeds your home’s value, if and when it will regain its prior value and whether your lender will agree to a principal reduction are all factors to consider in deciding between a Short Sale and Loan Modification, and whether Strategic Default is the best way to accomplish it. Do You have An Underwater Mortgage?
How Does Strategic Default Work
There are two options to start the Strategic Default process, contacting the bank from the start to let them know what you’re planning and why, or waiting for the bank to figure out what you’re doing on their own. When you actually decide to contact your lender, don’t let them know you’re formally declaring “Strategic Default” just focus on your financial problems and the foreclosure option you’re hoping for.
There are advantages to each of your timing options with the hope that working with the lender may lead them to help you or at least not pursue deficiency judgments or other sanctions. Not exactly Christmas morning. With the second option, the benefit of delaying contact with the bank translates to time and money as the longer the mortgage foreclosure process continues the more money you’ll save on housing costs. What the Heck is a Deed in Lieu of Foreclosure?
Regardless of when you actually speak with the bank, DON’T BE INTIMIDATED and don’t let anyone question the morality of your decision. Banks have no moral standing whatsoever to question your ethics or integrity because you’re making a decision that’s in your best financial interest, which is what banks do every day. The difference is that your banks’ never ending quest for short term profits has severely damaged the US economy while you’re just trying to keep a roof over your head. Foreclosure Is Not Your fault – Blame The Banks!
Because Strategic Default is not a stand alone remedy, use the specific methods outlined in our sections on Foreclosure Loan Modification or Short Sales to compile whats needed to convince your lender to give you what you want. Using one of the Lender Cover and Financial Hardship letters from our Sample Documents put together a professional looking package including information showing that your mortgage is underwater and by how much. Also be sure to send the materials to the actual owner of your loan rather than the loan servicing company who may have no real interest in helping you. Read more about Who Actually Owns Your Mortgage.
If you’re looking for a Foreclosure Loan Modification by having your principal reduced to fair market value, make sure the bank knows that you’re much more likely to continue making payments and that eventually your investment will pay off for both sides. In addition to avoiding the time and expense of foreclosing on your house, the housing market improves overall meaning banks make more loans and we can all get back to enjoying life and family rather than just trying to survive.
If you want permission for a Short Sale without the risk of a Deficiency Judgment, let the bank know that your credit score has already taken a hit and you have nothing to lose. Tell them in clear and unambiguous language that if they don’t agree to a Short Sale, they’ll face a long and expensive foreclosure lawsuit with nothing to gain but adding more property to an already bloated real estate portfolio. Banks only want to make money and don’t like holding excess property with ongoing maintenance, tax and insurance costs so use this knowledge to your advantage.
What Banks Think About Strategic Default
As you might expect, the concept of Strategic Default simply freaks banks out. Although banks make the same strategic decision every day when they buy stock in a company and then purchase options betting against the same company to protect itself, they don’t understand when a homeowner employs similar strategies to protect a home. Rent Your Home to Avoid Foreclosure
Rather than focusing on the larger economic conditions underlying our current foreclosure crisis, banks continue to treat homeowners asking for a principal reduction as if we have three heads. In fact, these friendly neighborhood institutions have begun working with the major credit scoring companies to develop a system that distinguishes borrowers who can afford payments but choose not to make them from those who truly can’t afford to pay. Recent Foreclosure Settlement A Big Win For The Banks
They look for homeowners with good credit history, low credit card balances and other diverse factors such as how long you’ve lived in the property and whether you’ve recently gotten any new credit. Using this information and presuming to know all about the individual circumstances which caused your financial distress, banks will decide how to treat you. Beat Foreclosure Stress
Once the nice guys at the bank figure out who the bad guys are — ever wonder why they have no mirrors at banks –they decide how pleasantly to talk with you on the phone, how aggressively to pursue foreclosure and whether or not to chase deficiency judgments against you. No joke and that’s why its important to fully educate the bank as to what caused your financial problems so they don’t stick you in the “bad guy (or girl)” category or take you out if you’re already there.
Importance of Mortgage Insurance
As discussed elsewhere on our site, don’t underestimate the Importance of Mortgage Insurance to help support your Strategic Default or any of the other Foreclosure Alternatives you pick to avoid foreclosure.
Mortgage insurance may have been required by your lender as a condition of closing on your loan to protect the bank in case of default. Now they’re on your team because they lose about $50,000-60,000 for each foreclosed property, so you can see why its also in their best interest to keep you out of foreclosure.
Overall, the mortgage insurer will be an advocate in your negotiations with the bank so be sure to include them in your overall plan BEFORE contacting the bank. In addition to helping persuade the bank to work with you, they may add money to the deal to help get the Loan Modification approved, and/or provide money for transition and relocation should you decide on a Short Sale.