Strategic Default

by Georgia Engineer from Atlanta

Ask Kate about strategic default: Kate, I am upside down in a mortgage owing $99K with a market value $87,000. I am looking to refinance it to rent or just sell it outright. I am currently at 6.75 percent APR with a credit score at or above 800. Is foreclosing and walking away feasible? Would they renegotiate on a rate?



Georgia Engineer continues... My lender offered about 6.25 percent APR with a HARP refi and offered 5.625 percent APR on a regular refi. Neither sound appealing with closing costs of $2500.

My credit union will not offer me a loan since I am upside down but they said I would otherwise qualify for a rate of 4.875 percent. All rates I quoted are for a 30 year fixed rate mortgage. What other options do I have?

Kate Answers: Strategic Default

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Dear Georgia Engineer,

Here's the deal... For today's homeowner, it has come down to picking your poison.

One option (aka poison) is strategic default. This practice is otherwise known as walking away from a property with no equity, even though the homeowner can still make the mortgage payment.

If payments are not a hardship, I personally do not recommend a strategic default. But either way, I am not the Moral Patrol. Homeowners need to decide what is right in their own eyes.

But if you are contemplating strategic default, be aware Congress is again discussing deficiency judgments and whether banks can sue homeowners who practice strategic default. Different states also have varying laws on the books regarding strategic default and deficiency judgments so contact an attorney before proceeding.

Besides strategic default, here are other negotiation options.

A second option is negotiating with the bank to sell the house for less than you owe. Hear what I told a Veteran who is living on credit cards and owes the IRS. You'll find my advice at Real Estate Short Sale.

Loan modification is a third option for owner-occupied properties. See why there is so much buzz over mortgage loan modification here.

Lastly, Donald Trump has this to say about negotiating with the bank.

What about HARP or HAMP?

HARP assists homeowners making payments on time who can't refinance due to a loss of equity in their homes.

HAMP assists homeowners with less than perfect credit who are struggling with interest rate increases or income decreases.

You can read HARP and HAMP questions I have received and answered here.

Click here to comment on Strategic Default

Best wishes,

Ask Kate


P.S. If you still have questions regarding Strategic Default, write me at Ask Kate where every question is a good question.

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Comments for Strategic Default.

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SEVERELY Underwater
by: C & D

Hi Kate,
I will keep it short and simple:

We owe 503k between the 1st Fannie Mae and HELOC Bank of America 40 year loan and our home is worth about 186k (assessed value last 3 years).

So when we called Bank of America we were told they can not help us because we have a Fannie Mae loan. All loans backed by GSE's are not participating in their principal reduction or PRA programs.

So instead they offered for us to short sale our house at current fair market value and walk away.

REALLY !???

Why don't they just modify or refinance the loan to us at fair market value?

What should we do?

Hi C and D, Kate here...

Sigh. Yes, this seems to be the new mode of operation, to 'help' homeowners with government sponsored entity (GSE) mortgages, aka Fannie Mae and Freddie Mac loans, walk away from homes. See No Principal Reduction Alternative for Fannie Mae or Freddie Mac (GSE) Mortgage.

Since you can't force the bank to reduce your principal balance, try asking for alternatives to their HAFA advice such as a HAMP loan modification without a principal reduction.

You probably suspect what else I'm going to say if you spend even a little time on my website. Write your elected officials in Washington DC, including the President, to implore them to take positive action for struggling homeowners and underwater mortgages.

Best wishes, Kate

NO real options for underwater mortgages with PMI
by: Michael

I am underwater approximately 80k on a 260k loan with PMI... The bank won't refinance nor modify... A short sale is out due to PMI...

So what is the answer? What does Kate think???

Note from Kate: Michael, It's a big decision isn't it, a dilemma many homeowners weren't faced with just a few short years ago. As one of my family members recently commented, "Things are just SO backward right now."

Not very specific but that's what I'm thinking... the current state of affairs for homeowners is so backward. But more specifically, if you CAN afford the payment, saving the house makes sense to me. However it is a very personal decision and I wish you the best of luck.

I hope you'll ask another question and comment some more. --Kate

My Lender Sucks
by: eugene

I am in the middle of strategic default and my lender has served me with foreclosure papers. I have about 4 months to get out.

I have offered $50,000 cash buy down for them to rewrite my mortgage at the newly appraised rate. They have so far refused.

The appraisal was down based on a short sale option.

Seems kind of sick that they are willing to sell my house at a reduced rate but unwilling to work with me to stay in my home.

So we foreclose and move on.

The financial sector stuck it to us good this time.

Thanks Charles and Vikki
by: Kate Ford

Hey, Charles and Vikki, Thanks for commenting! If you are lenders, please feel free to leave your phone number and location in a comment.

Here is where you can find out more about being in my directory: Lender Directory Sign-Up

Perhaps Walk Away from Strategic Default Idea
by: Vikki

Dear Georgia Engineer,

I have to say upfront that I agree with what Kate has already mentioned to you. There are other options for you to consider that are much more preferable than a strategic default and that are much less damaging to your FICO score.

Negotiating with the bank to sell the house for less than you owe, is a short sale and the market in Georgia is flooded with them. It will likely be more than a few years before that volume decreases. With that being said, housing inventory is extremely high and more lenders are not looking to lean on short sales quite as much as they were in the past year. Foreclosures are still running high as well, and that also attributes to the large numbers of homes on the market.

Loan modifications happen all the time and are much more favorable than most other options. Negotiation is the key and what you have to work with. Not knowing what county in Georgia you reside in, it is hard to say what the value of your home will be. What was it before the market free fall? If it was a more positive number, you may just want to ride the wave and hang on until the market turns. It will turn, although, it appears that it may be up to two more years until the dust settles and the market adjusts itself to normal volume. If making payments is not a problem for you at this time, I would think that this might be your best option to really work on. On the other hand, if the fair market value has been near to what your own and has not gained much over the years, your value may not bounce back as much as you would prefer even after the market adjusts. This option is for owner occupied properties.

You stated that your lender offered a 6.25 percent APR with a HARP refinance and offered 5.625 percent APR on a regular refinance. You also state that neither sounded appealing with closing costs of $2500. The rate of 5.625 was not a bad rate in Georgia at this time and it is more than the preferable 1 point difference in all refinances for it to make sense financially. Anything less than 1 point is not worth obtaining. You did list your credit score at or above 800. Double check that and make sure of those numbers. That is a respectable score and should allow you to have more leverage with your particular lender, if not make sure to check out other options.

You also asked, "Is foreclosing and walking away feasible? Would they renegotiate on a rate?" My response to walking away is what are you willing to live with after the fact? Possibly ruined credit and something that negative hanging on long after you have walked away? Also, possible lawsuits arising from the strategic default could be forthcoming? Finally, your current lender or lender of choice more than likely will attempt to negotiate with you, verses allowing you to default.

As with anything, it is up to you to perform your due diligence when making decisions that will have an effect on your life, credit and future happiness.

Ruin your credit
by: Charles Clark

I just was contacted by a person that did exactly what you are considering doing. His credit score went from (he said) 780 to now 590. He is now paying over 24 percent for a car loan, I would expect that his insurance rates have gone up. He had 2 credit cards go up on interest rate to over 30 percent last year due to lower scores (any creditor can check your credit using a "soft" hit any time)

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You can also ask Kate about your mortgage at Refinancing Advice The Nuts and Bolts.

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