A strategic default is a technique where a homeowner who can afford to make their mortgage payment on their home decides to stop making payments and allow the property to go into foreclosure. In most cases, the homeowner can afford to make the mortgage payments but has determined that their property has dropped so far in value that it would take years for the homeowner to recoup their investment, leading them to decide to walk away.
This technique has become more popular as real estate values have continued to decline or stagnate across much of the U.S. Strategic defaults are becoming so popular, in fact, that 60 Minutes broadcast a story on the practice earlier this year.
The story focuses on Arizona and Nevada, but strategic defaults are becoming just as common in California, where lenders have been extremely reluctant to agree to grant loan modifications or short sales.
Anyone who is thinking about doing a strategic default in California needs to be extremely careful. Under California law, banks may in certain circumstances be able to pursue a defaulting borrower. A bank may have up to four years to file a lawsuit against the borrower for the difference between the money loaned out and the amount recouped at the trustee sale. If the lender files a lawsuit for the deficiency, then the borrower could be forced to file bankruptcy, even years after walking away from the home.
A homeowner who has not refinanced their original “purchase money” mortgage generally is safe from suit, as their loans are non-recourse.