Strategic defaults make big news in both residential and commercial circles these days. A strategic default is one where, for any number of reasons, you choose to walk away from your property instead of being forced out. Most commonly this happens in properties where the mortgage is upside down and/or the bank won’t renegotiate your payments.
Strategic default on it’s face is a valuable tool that the property owner holds. It can sometimes be used to get your bank to the bargaining table. No matter what they say or how they play it your bank doesn’t really want your property. They have too much already.
But what are the risks of strategic default? Does it really solve anything?
If you own a commercial property you may have a non-recourse loan which means you cannot be personally liable if the loan is not paid. However, many commercial loans and virtually all residential loans are with recourse. That means that if you are responsible for the full amount of the loan whether you own the property or not.
How that applies to a strategic default is that you stay in your property not paying the mortgage until the time of your foreclosure. The bank sells the property at foreclosure and that is the amount that is credited against the amount you owe on the loan. It used to be standard practice that the bank would bid about 70% of the remaining loan. But not today. Your bank may start at 10% of the loan amount and not go any higher. It varies from bank to bank.
Once that happens you move out and try to start your new life thinking the worst is behind you. Then one day it comes in the mail. The bank sends you a bill for the balance of your loan after they credited you with the amount of the foreclosure sale. Can they do this? Absolutely. You signed a contract to pay them the full amount not to pay them the full amount or give them the house back. (Check your state law to see if it modifies this contract).
So the short story is that your strategic default may not have helped you at all. In fact, it may have hurt you a lot because you did not get the full value your house could bring. And you did not have a chance to negotiate a total release of the remaining debt. Seek competent professional advice before attempting any strategic defaults.