High earners & strategic default

Masochism alert: If you want to get good and depressed, look up your house on zillow this month.Type your address into www.zillow.com. When your property pops up, click on your address, above where it says “zestimate.” The next screen will show the 30-day price change. This showed my house down $35,000.00, not for the year, just for January.

Wowser, that’s one wicked drop.

There has to be a bottom coming for real estate values, but it is not here yet. The seemingly never-ending  slide of real estate values is also causing high income earners, who can otherwise afford their mortgage, to strategically default on their homes (and second homes) because they have lost hope that the market will rebound in their lifetime.

This excellent post on Dr. Housing Bubble points out that strategic defaults increase greatly once a home is underwater by more than $100,000.00. Also, if the neighbors start walking away the chances are others will do the same. Those with large mortgages and high credit scores are more likely to strategically default on their mortgages than those with small mortgages and low credit scores.

I do telephone consultations with clients almost daily and many of these clients earn $100,000.00 or more and can pay their mortgages, but several factors are pushing them toward strategic default:

1. They can rent a house that is much bigger and in better shape than the one they own for less than they are paying on their mortgage.
2. They are $100,000.00 or more underwater and have lost hope that the home’s value will rebound in a reasonable time. With each big drop on zillow, more people go sub-$100k and the likelihood of their strategic default increases.
3. They view the only negative of strategic default as being the hit to their credit score.

These clients are well-educated and they look into a strategic default  carefully before actually doing it. Most tell me that they have talked to several attorneys about the process.  I have to say that it seems to me that most have already made up their minds to quit paying on their mortgage and I have a hard time convincing them otherwise. Supposedly, all the high earners walking away from their mortgages frees up cash that’s spent on other things and gets the economy rolling (this is kind of a stretch).

There are many negatives to consider for a high earner before walking away from an existing mortgage. Some of these are:

1. Constant phone calls from the lender. Receiving several calls per day for more than 1 year can wear people out. This is the biggest complaint that I hear from clients who are in the foreclosure process.
2. Getting served with the summons by the sheriff. This is a terrible day for all but the most tough-skinned. Worse is being served at work by the sheriff (this rarely happens).
3. Trashing of credit score. Credit will go to 520 and stay there for awhile.
4. Association must be paid and will pursue you vigorously. If there are dues owed to a condo or townhouse association, these have to be paid until the foreclosure is over.
5. Second mortgage must be paid or settled. Second mortgage companies will file collection actions against clients. I highly suggest that no one quit paying a second mortgage unless they are ready to file a bankruptcy, because the second lender will be like a hell hound on your trail. I just filed a bankruptcy for a client who quit paying on a house that had a second mortgage. Two years after the foreclosure, the second mortgage company sued, got a judgment for $40k and was about to garnish his wages. So, a strategic default that involves a second mortgage is a very real financial threat and should not be done unless you are willing to pay the second mortgage or file banktuptcy.
6. First mortgages are not pursuing deficiency judgments, but this could change. Right now there are really no deficiency judgments being taken in Illinois and no collection actions being filed by first mortgage holders. What if this changes and the foreclosing lender dumps the foreclosed notes to a debt collector in the future? What if lenders start to seek deficiency judgments in Illinois? Things can always change, although I think this is unlikely.
5. Biggest worry of high earners: That the foreclosing bank will get a deficiency judgment and take other assets from the client. Clients are absolutely obsessed with this. First, the likelihood of a deficiency judgment on a first mortgage is slim. Right now, the only time this can happen is with a second mortgage, as discussed above. But clients wring their hands about this and worry that the lender will creep up on them down the line and take their cash or a new home bought in their spouse’s name.  This is not likely to happen.

This post titled Not Walking Away is For Suckers and For People Who Aren’t Rich, kind of sums the high earner/strategic default issue, better than I could.

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Related posts:

  1. Strategic Default in Illinois – Last man out of a dead condo complex
  2. Strategic Default in Illinois: Q&A
  3. FHA may tag Strategic Defaulters with Scarlet S for life
  4. Strategic default in the news
  5. Monster in the closet: Collection agency or deficiency judgment?

3 thoughts on “High earners & strategic default

  1. The motivation for a strategic default may depend on how far a borrower is underwater. Having a mortgage that’s twice as much as the value of a home could be somewhat discouraging. The prospect of being stuck with a losing investment that may not reach a break-even point for 10 years or more may be enough motivation to take a walk.

  2. Being in this position myself and having a possibly irrational fear of a deficiency judgment on our first mortgage, can you tell me if 529 college education savings plans are a protected asset class in Illinois? We are severely underwater and were unsuccessful in the load mod game, leading us to investigate other options.

    Thanks for the clear and informative website!

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