Walking Away from My Mortgage – Strategic Defaults

Strategic default, that is, stopping payments on a mortgage for reasons other than an inability to make the payments, has become a trend nationwide for homeowners who own properties with values that have significantly decreased.  The consequences for walking away from your home vary depending on the state you’re located in and the type of loan you have taken out.  In California, generally, property owners who have taken out a purchase-money loan in a primary residence are not liable for a deficiency judgment by the lender.  The laws on deficiency judgments vary state by state. 

Although you can generally find out what your liability and tax consequences might be for walking away from your mortgage by contacting a real estate attorney and CPA, it is difficult to know what future effects the strategic default will have.  Specifically, will a homeowner be able to purchase a property again, and when. 

FannieMae has released two underwriting guidelines recently describing what waiting periods must be in effect after preforeclosure events, like short sales, a deed-in-lieu of foreclosure, or a foreclosure.  FannieMae has now altered their policy to encourage borrowers to work with their mortgage servicer to avoid foreclosure, and has instituted guidelines on how long Fannie Mae will wait before they might lend to a borrower who has a “credit event” like a foreclosure on their record.   FannieMae is encouraging borrowers to attempt modifications by communicating with their lenders.  Borrowers who have extenuating circumstances, and those who communicate with their lenders to work towards a modification solution, may be able to qualify for a FannieMae backed mortgage in as little as three years.  Borrowers who don’t will be penalized, as the current five year waiting period requirement has been increased to up to seven years. 

 Interestingly enough, FannieMae is also encouraging servicers to provide recommendations in the future on whether the borrower is a “strategic defaulter” and whether the borrower is a good candidate for a deficiency judgment. 

 A deficiency judgment is a judgment secured at the conclusion of a foreclosure lawsuit by your lender, for the difference between the mortgage and the amount received at the foreclosure sale.  The lender must file a lawsuit against you, where you receive notice and have the right to defend yourself.  If you do nothing, the lender will automatically receive a judgment.  If you are sued by your lender, it is important to contact a real estate attorney who can advise on whether the lender had the right to sue, and whether there are any statutory protections in place that you can use as a defense.  An attorney can also help you negotiate a settlement if you do not have a legal defense.