Mountain Boy LLC

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.

You may have heard about Forensic Loan Audits. That is where a company, usually for a fee of several hundred dollars, will look through your loan documents and tell you all the errors the lender made in the loan process.

The FTC has issued a warning stating this process is a scam and produces no results. Is that correct?

Here’s my personal experience with 50+ forensic audits.

1. The banks do not roll-over and accept the audits…ever. If you are looking for a quick solution, this is NOT it.

2. Forensic loan audits are not a miracle pill. In fact, I’ve yet to see them accepted by a bank for any concessions.

3. Forensic loan audits are valuable in several ways though:

A.  They let the bank know they are dealing with someone who knows what they are talking about…if you use them correctly. You have to actually know what you are talking about. The banks can see clearly through people bluffing it. It’s very obvious when you try to do it yourself if you haven’t taken the time to educate yourself. But you have though, you have done some playing field leveling and the banks knows it.

B.  You will never get concessions for specific items, but you will get more general concessions.

C. It is very useful if you end up in any court setting from seeking a Temporary Restraining Order (TRO) to trying to get your mortgage wiped out in full. You now know where the bank is weak and you have an expert that can testify on your behalf. That gets you a good way down the road to bringing the bank to the negotiating table.

If you are obtaining a forensic loan audit with the hopes that it will solve all of your problems it is a waste of your money. If you will back up your forensic loan audit with the knowledge to know how to use it properly and you either have or will hire the negotiation skills to back it up then the additional leverage it provides will return its cost to you many times.