If your home or property has fallen underwater, meaning the balance of your mortgage loan exceeds the fair market value of the property, you may decide that your property has become a bad investment. Rather than continuing to pay money into an asset that may take a long time to regain its value, you may instead decide to pursue a strategic foreclosure or to voluntarily default on your mortgage and allow the property to be foreclosed on. Strategic foreclosure has both benefits and consequences, so you’ll want to speak with a foreclosure attorney before deciding to pursue this option.
The attorneys of Sasser Law Firm can help. Our legal team has extensive experience exclusively representing clients facing financial difficulties. Over two-plus decades, we have helped thousands of clients obtain financial relief through bankruptcy and other alternatives. We have the knowledge and resources necessary to take on the toughest cases. When you hire us, you will never be pressured into taking any path to resolve your situation. We lay out your options and give you the knowledge necessary to make the best choice for your interests.
To learn more about the options available to you when your home or property has become a poor financial investment, reach out to the North Carolina foreclosure defense attorneys of Sasser Law Firm for a free initial case review.
What Is Strategic Foreclosure?
Strategic foreclosure, also called strategic default, refers to the tactic of intentionally defaulting on a mortgage, even when the property owner can still afford to make the mortgage payments. Strategic foreclosure is sometimes used when a property becomes so underwater that it may take years for it to regain the value that the owner originally paid for it. In some cases, the property owner may even finish paying off the mortgage before the property regains all its original value. Under these circumstances, the owner may simply deem the property a bad investment and may choose to “walk away,” allowing the property to go into foreclosure so that they can use their money for more profitable or financially sustainable investments. Strategic foreclosure or default differs from the situation where a property owner can no longer afford to make the mortgage payments in addition to their other expenses and eventually falls behind on payments.
Pros and Cons of Strategic Default
The primary benefit of strategic default is not having to continue sinking money into a property that has fallen severely underwater and will not likely recover the value of the original purchase price for many years. Some states allow deficiency judgments if the foreclosure sale price does not meet or exceed the balance on the mortgage, where the bank pursues the remaining balance of the mortgage from the property owner through collection methods like garnishing wages or levying assets. Fortunately, North Carolina has strict anti-deficiency laws to protect homeowners, and a deficiency judgment cannot be pursued if the mortgage was a seller-financed, purchase money mortgage or a deed of trust.
Nevertheless, strategic default or foreclosure can have negative consequences that property owners need to consider before making the decision to walk away from their property. The primary consequence is suffering negative marks on your credit report, which can make it difficult to obtain a future mortgage or other loans. In addition, there is the social stigma of having been foreclosed on, which can potentially make it difficult to procure housing and employment. Fortunately, a strategic default can allow you to recover more quickly than a typical foreclosure, and you may be able to qualify for another mortgage fairly soon.
How to Avoid Foreclosure
If your property has become a bad investment, you may have alternatives to a strategic foreclosure or default. These alternatives include:
• Loan modification to reduce monthly payments – While a property may currently be underwater, real estate markets can suddenly boom over the course of just a few years, putting you back into positive equity. A loan modification can lower your interest rate by extending the loan’s term. However, obtaining a loan modification on an underwater property may be difficult, as lenders won’t want to take on added risk from a property that has lost significant value, although some banks might consider reducing or forgiving a portion of the principal if the property has lost value. Receiving forgiveness on a loan may create additional tax liabilities, so you’ll want to consider all repercussions first.
• Short sale – In a short sale, a property is sold for less money than is owed on the mortgage. While a short sale could subject the property owner to a deficiency judgment for the balance, they can avoid one by reaching a settlement with the bank or by having enough cash on hand to settle the remaining balance of the mortgage.
• Deed in lieu of foreclosure – When a bank accepts a deed in lieu of foreclosure, it takes ownership of the property instead of foreclosing. A property owner may still be liable for a deficiency judgment for the negative equity in the property, unless they can get the bank to waive a deficiency judgment, or if the mortgage was a seller-financed, purchase money mortgage or a deed of trust.
What Happens If You Walk Away from Your Home?
If you choose to pursue a strategic default, the bank will eventually pursue foreclosure proceedings. In North Carolina, mortgage holders may choose to pursue a judicial foreclosure, which involves a lawsuit, or a non-judicial foreclosure, which largely bypasses the need to go to court before the mortgage holder can sell the property at a foreclosure sale. The mortgage holder will almost certainly complete the foreclosure sale in a strategic default, as you have decided to walk away and not make any effort to keep the property.
Because the mortgage will likely still have a remaining balance after a foreclosure sale in a strategic default, the mortgage holder may decide to pursue this outstanding balance through a deficiency judgment. After obtaining a judgment from the court, the mortgage holder could be entitled to garnish
your wages, levy bank or brokerage accounts, or seize other assets to pay the outstanding balance on the mortgage.
Foreclosure also places a negative mark on your credit report, which will decrease your credit score. This can make it harder to obtain new housing, as you have demonstrated your willingness to walk away from your obligations under a mortgage.
Get Legal Help from a Foreclosure Defense Attorney in North Carolina
If you are considering strategic foreclosure as a means of getting out from under a financially unsustainable mortgage, reach out to Sasser Law Firm for a free, confidential consultation. Our board-certified defense attorneys will discuss all options relating to strategic foreclosure, with no pressure. Give us a call today at (919) 319-7400 to learn how we can help