Strategic Default, Florida

Interview with Matt Englitt, KEL Attorneys, Florida, September 28, 2010

Define a strategic default:

There’s nothing illegal about defaulting on your mortgage. People have been doing it for years. This is nothing new.

Strategic default means that the person involved considers the home to be a formal investment and has chosen to default because it’s an unwise business decision to continue to owe the bank.

My firm is a full service private law firm working throughout Florida. We can do everything, but in this economy a lot of our caseload is foreclosure and bankruptcy.

Profile of someone who decides to pursue a strategic default:

Maybe ten percent to 20 percent of my foreclosure cases are strategic defaults. We have thousands of clients, about 7,000 open cases, and between 700 and 1,400 are strategic defaults, and that’s a good number.

My average strategic default client has a six-figure income, has a good retirement account, and has some assets. On average, they owe about 400,000 and it’s worth half of that right now and they can be looking at a loss of 200,000 or more.

What is the procedure for a strategic default?

First part of what we do is create a strategy for asset protection, so we have an in-house attorney, who will sit down and advise the homeowners on protecting their assets.

Second, we develop the defenses to the inevitable foreclosure litigation.

There are lots of defenses on behalf of homeowners that will let them out of their mortgage, minimizing their losses. They will have to bear some of the losses, but they will be able to minimize their loss on the property.

Lets say that the bank takes the house back and there’s a loss of $100,000. My client will not have to bear the whole loss, the bank will take some, and my client will take some, too.

What about short sales and deed in lieu?

Sometimes, as resolutions to our cases, our clients can do a short sale or deed in lieu, these are alternatives to strategic defaults. A short sale is just one way we may resolve that case and the bank might want us to do that. The bank may say list the house. A short sale does not have to be a hardship case.

With a short sale, the key component is that the borrower is responsible for the deficiency. The bank could let you out, or it could reserve the right to sue you down the road. We negotiate that with every client.

Banks don’t look at hardship when doing a short sale. Early on, a year and a half to two years ago, when it was at the height of foreclosures, banks wouldn’t put up with a fight for a deficiency. Now, it’s difficult to get them to waive the deficiency.

In those cases, I advise the client against doing the short sale.

What is the defense?

If you don’t do a short sale, and then go into the litigation of the case, the lender will file a foreclosure, and that’s when we will do all of our legal maneuvering right there. The lender realizes it will be a heck of a fight and realizes it may not be able to get the house back for any number of reasons.

For example, we have a good fraud and inducement defense — that the bank lied about the terms of the loan. Or some banks did appraisal shopping, to get the high number that they wanted so that they could get a big loan.

These are some of the defenses that the banks see we can prevail on and puts pressure on the banks not go the distance in the case.

What are the consequences to the homeowner who decided to pursue a strategic default?

Normal outcome: I hate to just throw a number at it. A typical resolution depends on the client’s financial position. If the client has money, he has to come up with a portion, and cover 10 to 70 percent of the loss.

If client doesn’t have much money, or if their assets are protected, then I can get them an even better deal. It depends on what the bank can get from the client. That’s why we do the asset protection before the client defaults.

Asset protection all depends on how your assets are titled. Oftentimes, we have a husband and wife come to us and the note is in one of the spouse’s names and all the other assets are held as a married couple. So the bank can’t go after joint assets of the husband and wife, because only one signed on the note.

So, they need to get assets into being held by husband and the wife. 401Ks are completely exempt from creditors, and, in Florida, your homestead is completely protected from the creditors, so the couple can go out and buy a home with cash and that would be protected. They can go buy a house for a bargain, now, and put a good chunk of cash on it and it would be completely protected from their creditors.

How much does it cost?

For strategic default, we start at $3,500 for coming up with strategy and doing the litigation until its resolved, but coming up with a strategy could cost a couple thousand more, but usually $3,500 to $4,500 will handle us doing the entire case.

What about the morality issue?

We do see complaints of issue of morality with strategic defaults, but we don’t think that should play into making a financial decision. Businesses and investors don’t do that.

These are collateralized loans. The bank should get your property and your property only. In many states, the banks don’t have the deficiency option — the legal right to sue you. They get the property back and sell it. The bank is supposed to lend a certain amount of a property’s value, so if the property goes into default, they get the property back. In a majority of states, they don’t have the option to sue you personally if you default in your mortgage.

Sure, the banks didn’t know that property values would drop so much, but they shouldn’t have risked so much money thinking that it wouldn’t drop, and they should not lend such a high ratio – they’ve loaned 100 to 110 percent of the purchase price — they should lend only a potion. That way, the owner has to make an investment. That’s suppose to be the way it’s done, but the banks make so much money off lending money.

And as a side note, the banks are already back doing it again. They are already back to lending 100 percent of the purchase price, and they are back to the same whole thing, including Fannie and Freddie – they are not making homeowners come up with down payment. Now, when a default happens, the money comes out of the taxpayers’ pocket. The banks are loaning 100 to 104 percent of the purchase price and that’s a recipe for disaster.

I think you’ll see more and more people strategically defaulting. Because, if you see the financial analysis that we sit down and do, if the homeowners bought in the bubble at the height of the boom, they won’t be able to pay off their loan for 15 to 20 years.

And, that doesn’t include renting a house that’s very similar to their current home, for half of what they are paying every month to own their home. So, if you combine those two numbers, they are losing well over $100,000, sometimes $200 to 300,000, and it doesn’t make sense to keep it.

Develop a strategy and do the asset protection, listen I’m not going to minimize. There’s a lot I can do for you.  Sometimes, some people have so much money, there’s not much I can do for them. But sometimes I can do something. For example, they might be able to take the money, put it in a trust. They’d have to wait two years before they can default. Sometimes with asset protection, you have to wait until you fall behind; otherwise it’s a fraudulent transfer. There are no absolutes. Always a risk, but by and large, clients that don’t have millions, can minimize drastically what they lose on these properties.

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