Among many homeowners who have strategically defaulted on their home mortgage and simply walked away from their financial responsibility, there has been a feeling of calmness as they feel that they have simply rid themselves of the problem. Unfortunately, as many of these strategic defaulters are realizing, that sense that they have felt was a false sense of calm.
When a person walks away from their mortgage, the bank or lender is forced to sell the home in an effort to recoup as much money as possible. But with the housing market the way it is and with the eagerness of the banks to unload these properties, the homes are selling for much less than what is owed on them. In order to make up the deficiency, banks are increasingly obtaining deficiency judgments against the strategic defaulters. The banks then sell these judgments to debt collectors who then aggressively going after these homeowners.
Joseph Reilly of Florida found this out the hard way. He lost his vacation home last year because he stopped paying on the mortgage after losing his job. For many months, he thought the situation was over. But he received a phone call just a few months ago informing him that there was a judgment against him for nearly $193,000, which was the difference between what his vacation home actually sold for and the amount that was owed on it when he defaulted.
There are 41 states that allow banks and lenders to sue mortgage borrowers for deficiencies if they decide to walk away from their payments. While banks had been lenient on defaulting homeowners in the early years of the housing crisis, many banks have decided to exercise their rights to get a personal judgment in order to try to bring in more money that is owed to them, which is quite often $100,000 or more on each foreclosed home that they sell.
While banks are stepping up their efforts to recoup money from borrowers who have walked away, it is still a small number of cases where they sue for their shortfalls. The majority of cases in which they sue for deficiencies occur when they perceive that the borrower was a strategic defaulter and simply chose to stop paying their monthly mortgage payments even though they could still afford to do so.
Even when banks sell these debts to debt collectors, there isn’t much money to be made by the banks. It is believed that the judgments only sell for about two cents for every dollar - which is a lot less than the seven cents on the dollar that debt collectors typically get for credit card debts. For debt collectors, however, the business may be more compelling. Most of the states that allow these deficiency judgments allow collectors up to 20 years to collect on the debt and with an interest rate that is ordinarily allowed to be as high as 8 percent interest rate, the debtors could owe a lot more after just a few years.
If you have been considering doing a strategic default as a way to save money or start over, be aware that banks are being more aggressive than they have been in recent years. Depending on the state you live in and your particular circumstances, you may still be on the hook for the difference between how much you owe and what the bank actually sells the house for after you default on the loan.