Read the rest of the article by clicking here or cut and paste the following http://www.msnbc.msn.com/id/40704053/ns/business-real_estate/By Jane Hodges
msnbc.com contributor msnbc.com contributor
"More Americans than ever are showing a willingness to walk
away from their underwater homes,
according to a recent survey. Chris Kelly is a perfect example of someone who
never thought she would send the bank “jingle mail” — mailing the keys back. But
she did.
Monday, December 20, 2010
MSNBC article on strategic default
While we are on the subject of strategic default, MSNBC released this article this morning:
Sunday, December 19, 2010
When Strategic Default is not a good strategy
With the housing market on life support and thousands of homeowners "under water" on their homes (the loan balances exceed the value of their property), we hear that many borrowers are opting to quit making their mortgage payments, even though they may have the financial ability to keep current. The informed decision to intentionally default on the loan or loans under these circumstances is called a "strategic default".
Indeed, it is frustrating and downright depressing to have to keep making monthly payments to the bank on a $300,000 mortgage when the repo next door goes for $150,000 but while it is tempting to just walk away from a property that is under water, there can be serious legal consequences for the unwary borrower. Aside from the obvious hit to their credit score resulting from the failure to make payments, they need to consider the possibility of a deficiency judgment.
In California, there are anti-deficiency laws which protect most borrowers of single-family residences from personal liability for their home loan. The money loaned by the bank for the purchase of the residence is referred to as a "purchase money" obligation and in the event of default the only thing the bank can do is foreclose on its security. The bank cannot sue the borrower for a personal money judgment for the balance owed on the loan. When the property goes to trustee's sale, the note ceases to exist.
However, it is possible for the homeowner to lose the purchase money protection if the original loan is refinanced. Greater danger lurks when there are junior liens on the property. For example, many individuals have 2nd and 3rd, and even 4th deeds of trust on their property as a result of refinancing or additional borrowing for other purposes (to pay off credit cards, to purchase automobile, to pay for college tuition, vacation, etc.) with the residence used as collateral. These types of loans are generally not purchase-money and the borrower is personally liable for payment.
When the borrower opts for the strategic default method, it is possible that the holder of the 1st lien on the property may foreclose and when the property goes to sale the junior lienholders are "wiped out" (they lose their lienholder status). Consequently, the lenders no longer have any collateral to secure the loan and they can pursue the borrower in state court for a personal money judgment for the unpaid balance of the loan.
The final result of the strategic default in these cases is that the borrowers not only lose the home, but their credit is damaged and they wind up with debt collection actions and possibly one or more money judgments entered against them.
Indeed, it is frustrating and downright depressing to have to keep making monthly payments to the bank on a $300,000 mortgage when the repo next door goes for $150,000 but while it is tempting to just walk away from a property that is under water, there can be serious legal consequences for the unwary borrower. Aside from the obvious hit to their credit score resulting from the failure to make payments, they need to consider the possibility of a deficiency judgment.
In California, there are anti-deficiency laws which protect most borrowers of single-family residences from personal liability for their home loan. The money loaned by the bank for the purchase of the residence is referred to as a "purchase money" obligation and in the event of default the only thing the bank can do is foreclose on its security. The bank cannot sue the borrower for a personal money judgment for the balance owed on the loan. When the property goes to trustee's sale, the note ceases to exist.
However, it is possible for the homeowner to lose the purchase money protection if the original loan is refinanced. Greater danger lurks when there are junior liens on the property. For example, many individuals have 2nd and 3rd, and even 4th deeds of trust on their property as a result of refinancing or additional borrowing for other purposes (to pay off credit cards, to purchase automobile, to pay for college tuition, vacation, etc.) with the residence used as collateral. These types of loans are generally not purchase-money and the borrower is personally liable for payment.
When the borrower opts for the strategic default method, it is possible that the holder of the 1st lien on the property may foreclose and when the property goes to sale the junior lienholders are "wiped out" (they lose their lienholder status). Consequently, the lenders no longer have any collateral to secure the loan and they can pursue the borrower in state court for a personal money judgment for the unpaid balance of the loan.
The final result of the strategic default in these cases is that the borrowers not only lose the home, but their credit is damaged and they wind up with debt collection actions and possibly one or more money judgments entered against them.
It pays to be careful and know your legal rights and obligations before making a major financial decision.
Monday, March 29, 2010
In the beginning...
In the beginning there were words. Those words were compiled to create phrases and from those phrases was created legal verbiage. In this blog (or "blawg" as legal blogs are often known) I will attempt to translate this verbiage through occasional updates pertaining to the practice of business and estate law in California.
This blog, while discussing legal information, does not constitute legal advice. For client inquiries contact me directly by e-mailing Rick_Von@msn.com or by phone at (760) 747-8841.
This blog, while discussing legal information, does not constitute legal advice. For client inquiries contact me directly by e-mailing Rick_Von@msn.com or by phone at (760) 747-8841.
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