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Strategic Default

foreclosure assistance for homeownersMortgage Basics

Individuals who take out a mortgage or refinance a mortgage generally execute two types of documents. The first is a promissory note. A promissory note is simply an “I owe you.” It creates a financial liability to repay the amount borrowed. The second item that is executed at the time of the closing is a mortgage. The mortgage is the document that secures the debt obligation. The mortgage provides the bank with a lien on your property. If you don’t make the mortgage payments the bank forecloses and sells your property at auction.

What Banks Do When You Don’t Make Payments

The first thing a bank does if you stop making your mortgage payments is they analyze the value of your home and its liquidation ability to pay the loan off. They then hire an attorney and the attorney files a foreclosure legal action on behalf of the bank.

Deficiency Judgment

If when your home is sold in the foreclosure sale, the amount received by the bank is insufficient to pay off the promissory note, a deficiency exists. A bank can bring a second lawsuit to obtain a judgment against you and force you to pay this deficiency amount. Here is an example. Your home is worth $300,000. But you owe $400,000 on it related to your mortgage. You fall behind and the bank takes legal action against you and eventually they sell your home. At the time of sale a speculator buys your home for $200,000 ($100,000 less than it is actually worth. This often happens because at foreclosure sales, speculators bid cash on homes that they know very little about other than an appraisal from the exterior and review of what other homes in the area sold for).

The bank receives only $200,000 from the transaction when you owe them $400,000. That leaves a deficiency against you of $200,000. The bank can sue you and obtain a judgment for that $200,000. One remedy you would have would be to thereafter file bankruptcy and eliminate the balance of the deficiency.

Strategic Default and How It Works

A strategic default involves taking into consideration whether your home is under water and it may never be worth the value of the mortgage. You simply stopped making your mortgage payments. Thereafter later on you negotiate a short sale, a mortgage modification, or a deed in lieu of foreclosure.

Strategic default means you are simply walking away from your mortgage. It takes place when a borrower decides he or she is going to intentionally not pay his or her mortgage because it no longer is financially practical. This usually occurs when the house is under water (worth significantly less than the amount of the mortgage).

Strategic default should not be undertaken without sound legal advice from an experienced attorney who has handled numerous transactions of this nature. There are a variety of pitfalls that can take place concerning a strategic default. If you are considering walking away from your home and/or mortgage because you can’t afford to pay it, feel free to call our office for a consultation. This is not a matter that should be taken lightly. Although a strategic default may be appropriate in some situations, there are many situations where it is not.

assisting homeownersElliot S. Schlissel is a foreclosure lawyer. He has helped scores of his clients stay in their homes and fight foreclosure proceedings. Elliot sues banks and other financial institutions who have broken laws, failed to obtain appropriate assignments, and who do not have appropriate standing to bring foreclosure lawsuits. His phones are monitored seven days a week. Call for a free consultation.

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The information you obtain at this website is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your particular legal issue. This is attorney advertising.

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