These days anybody who watches TV sees happy people who have made the decision to do a strategic default, it’s on 60 min., on your local news, and on the Internet. Everyone’s always happy and you get the impression it’s easy to do. It’s not like sometimes that strategic default is a good idea. Sometimes it is a good idea. My problem is that the media is making it look like you can make these decisions without any advice (except from them). In California and that is where I practice law, you have two major conversations you need to take into apartment damansara consideration. Then after you’ve read this… see a lawyer, see a CPA, then you will have done your homework.
The conversation really has to take in two main topics: “recourse” (whether the mortgage lender can sue the borrower, in addition to foreclosing); and TAXES.
California is a nonrecourse state. What does that mean? Short answer: “purchase money” mortgage lenders (i.e. lenders who made the loan to actually buy the home) on primary residence do not have “recourse” to sue the borrower if the borrower doesn’t pay. The lender may foreclose. Period. This is actually a pretty narrow class of lenders. Many mortgages now in effect are (1) not purchase money and / or are (2) not on real property financed as a primary residence of the borrower.
The latest federal legislation on this subject creates a sort of tax immunity for a deficiency when a borrower’s primary high end condominium residence is sold for less than is owed on the loan. But that immunity is pretty narrowly defined. Lots of people are thinking that the only two “elements” are that the foreclosure is the primary residence. Bad mistake. The immunity applies for sure to “purchase money” mortgage(s).”Purchase money” is exactly what it sounds like: money used to purchase the real estate.
Example: Fred and Ann bought their home in 1998 for $250.000. By 2005, it was “worth” $500,000, and the bank gladly – eagerly, in fact – refinanced for $400,000, putting $150,000 in their pockets. Money was easy. That cash-out refinance, I believe, is not qualified as “purchase money.” In some locales, there aren’t many of those left. Refinances are not purchase money. And this temporary immunity (set to expire in 2012) doesn’t apply to investment properties. If the high-end condominium home you are going to walk away from was refinanced, get a legal opinion in plenty of time to allow you to take appropriate action before the date set for the “trustee sale.” Once that sale has happened, tax consequences are likely locked in. A deficiency may still be disposed of in bankruptcy, but don’t wait to get the information you need.
Home equity lines of credit:
These are almost never “purchase money” and should be assumed to be a serious risk of collection action and / or lawsuit, judgment, wage garnishment and possible asset seizure..
If you are considering a strategic default there is a lot of money at stake. Don’t make the mistake of making this decision based on the Internet, TV or friends advice. Spend the money go see an attorney or a CPA, get professional advice. Get it in writing, then move ahead.