What Is A Strategic Foreclosure?

Many Americans are going to great lengths to save their homes; from maxing out credit cards to getting a foreclosure attorney.  There have even been stories of people blockading their property to prevent eviction.  But a small minority of owners are actually walking away from their homes even when they can afford the mortgage.

Strategic Foreclosure

If you bought during the peak of the real estate market, the value of your home may have decreased anywhere from 10 to 40% or more.   For many, this is irrelevant, because they plan on being there for the long run.  But others bought with the intention of reselling their home for a tidy profit in a few years.  Whatever the case, many are choosing to walk away simply because their home is worth so much less than what they paid for it.  This is called a strategic mortgage.

Right now only a small percentage of people are doing this.  But if prices continue to decline, this may become much more common.  In fact, a recent poll recently found that 32% of homeowners say they would walk away if the value of their home continues to decrease.  They say it would be better to cut their losses and get an apartment than continuing to pay on an underwater home loan.

Consequences

If you’re contemplating this technique, there are consequences to consider.  First of all, a strategic foreclosure impacts your credit in the same way a regular foreclosure does.  That means it will stick around on your credit record for at least 7 years. 

During that time, it will most likely be more difficult to get credit cards, car loans, or any kind of lending for that matter.  According to internet forums and credit card reviews, right now it’s even difficult to obtain something as simple as a department store card if you’ve had a recent foreclosure. And if you’re dreaming of a Visa Black card or some other premium piece of plastic, you can forget it as long as that foreclosure is on your credit file.

Alternatives

As ironic as it sounds, there’s never been a better time to have troubles with your mortgage.  With so many new programs, incentives, and regulations to protect homeowners, there’s a good chance you can modify your mortgage.

There are now opportunities to get a historically low APR.  Depending on your current rate and the amount you borrowed, this has the potential to save you hundreds of dollars a month.

Rate Reduction: 

  This may be harder to do, but depending on the price you purchased your home for, you may be able to get the amount of the principal reduced.

Principal Reduction:

Foreclosure Freeze:  This varies state by state and the rules are constantly changing, but there are some areas which have put a “freeze” on new foreclosures; postponing them an extra 30 to 90 days.  During that time, they want you to try and work out a new payment to keep you in your house.

The bottom line is that help is available and a strategic foreclosure may not be necessary.  Consult the internet or an attorney which specializes in this field to find out more.

Finding foreclosure listings and foreclosed properties by city and state can easily be done through sites like GoHoming.com

What is Foreclosure?

Many people who are in Foreclosure don’t understand exactly what the process is.  Even if you do think you understand it, this article may teach you something new. (Note: Please understand this is a very general discussion and laws vary by state.  The purpose of this chapter is to give you an understanding of what is happening to you in this process, not to teach you every legal detail of the foreclosure process.)
You may not have realized what you were signing in that big stack of papers when you bought your house, but there were two main documents – a promissory note and a security instrument (either a mortgage or a deed of trust).  The promissory note says you promise to pay for the house, and spells out the terms such as sale price, interest rate, payment amount, when payments are due, etc.  The security instrument says you agree that if you don’t make your payments, they can sell your house to satisfy the debt.
Generally speaking, there are two types of foreclosure, judicial and non-judicial. It is much easier to foreclose in a non-judicial state, because as the term implies, no judge need get involved.  In a judicial state, the lender must file papers, wait for a hearing to be set, and then wait days or weeks for the hearing to be scheduled.  In a non-judicial state the foreclosure proceeds on a well-defined timetable, which is often much shorter in duration that a judicial foreclosure.  If you are in a non-judicial state, you need to act quickly!

Judicial Foreclosure
In judicial foreclosure states, the security instrument is usually a mortgage, which is an agreement between you and the lender.  If they foreclose, you both have to appear before a judge.  The judge will order the house sold at the Sheriff’s sale unless you convince him or her that you have a good reason for not making your payments, which is highly unlikely.
Generally speaking, foreclosure is slower and more difficult for the lender in judicial states, because to a certain degree they are at the mercy of the court system and scheduling. However, do not assume anything regarding how long the process will take – verify this with your local county clerk or other public official, or better yet, a local attorney.

Non-Judicial Foreclosure
In non-judicial foreclosure states, the security instrument is usually a deed of trust, which is an agreement between three parties – the trustor (or borrower, that’s you), the trustee (a third party the bank chooses to look after the lender’s interests, this is usually an attorney), and the beneficiary (the lender).  Foreclosure is much easier in non-judicial states due to the fact that no court hearing is required.  The trustee handles the entire process of the foreclosure including the actual sale.  In reality, you will often see a “substitute trustee” handling the case on the local level if the actual trustee is geographically distant from the courthouse where the sale is being held.  The actual trustee simply hires another, local law firm to handle the case for them.

Redemption
In a handful of states, the homeowner can redeem the property even AFTER the foreclosure sale within a specified number of days, known as the redemption period.  To do so, specific legal procedures have to be followed, and you must pay all back payments, interest (usually 10% and up), penalties, legal fees, redemption fees, and for any improvements made to the home since the sale.  In some states, parties other than the homeowners have the opportunity to redeem the property once the homeowner’s opportunity has expired.  These may include persons who hold or have obtained junior liens such as mechanic’s liens, judgments, second or third mortgages, etc.  Redemption periods are more likely to exist in judicial foreclosure states. See Appendix One to determine if your state offers a redemption period.

Deficiency Judgements
If the foreclosure sale fails to generate sufficient funds to pay off the loan balance, then the lender may sue for a deficiency within a period of time after the foreclosure sale. A judge may find you still owe more money to the lender, and enter a judgment for that amount. The lender will then file the judgment as public record in your county.  Your ability to buy or sell other real estate will be impaired until the judgment is satisfied.

Sheriff’s Sale
In all cases there is some point at the end of the procedure that we will refer to as the Sheriff’s sale.  Whether it is simply the final stage of a well-defined process (in a non-judicial state), a court hearing where the judge orders the sale (in a judicial state), or some other tipping point, at some point there is a day when you lose ownership of the house and will be essentially evicted.  Our goal in this book is to never get to that day.
Appendix One contains a table listing the foreclosure laws by state and links to websites that spell out the process in detail on a state-by-state basis.  Be sure you understand how the foreclosure process works in your state, and verify it with your local county clerk’s office to be sure the law hasn’t changed.