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Whether a borrower can engage in a strategic default depends on whether the borrower lives in a state that has consumer protection statutes known as "anti - deficiency" statutes. Anti - deficiency laws are designed to protect the homeowner from being personally liable for loans secured by their residence when the home is "underwater" i.e. " when the principal balance on the loans are in excess of the value of the property
In many states, some form of consumer protection has been enacted by the state legislature. This prevents banks from suing homeowners for deficiencies. These laws typically apply to single family owner occupied residences.
In California, for example, the legislature enacted Code of Civil Procedure section 580b which prohibits a deficiency judgment in the strict sense, i.e., a personal judgment against the debtor. In relevant part the code section provides as follows:
"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."
"No deficiency judgment shall lie . . . . under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property . . . . or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."
Like most states that have such legislation, California limits its anti - deficiency laws to residences i.e., "dwelling of not more than four families." Thus commercial real estate properties do not fall within the consumer protection statutes of most states.
While strategic defaults are permissible in many states, depending on the nature of the loan and property, you should consult with an attorney in your state to find out if your state has such statutes permitting strategic defaults and whether or not the statutes apply to you.
So if your personal residence is "underwater" in the state like California and it is secured by a "purchase money" loan, you can safely "walk away" from the mortgage and its financial obligation without fear of being sued by your lender.
Once you made this determination, that you are in an anti - deficiency state and that the anti - deficiency statutes apply to you, your next decision really is one of personal choice. Do you love the house? Do you think the market will recover? Can you afford your mortgage payments?
It is certainly nice to know that you do have choices. However, be clear not everyone can simply "walk away" from their mortgage. It is best that you seek legal advice from a competent real estate attorney in your state before you make the decision to "walk away."
Interpretation of anti - deficiency consumer protection legislation can be tricky and I strongly advise that you seek legal advice from a competent real estate attorney in your state before you make any final decision to "walk away" from your home.
In many states, some form of consumer protection has been enacted by the state legislature. This prevents banks from suing homeowners for deficiencies. These laws typically apply to single family owner occupied residences.
In California, for example, the legislature enacted Code of Civil Procedure section 580b which prohibits a deficiency judgment in the strict sense, i.e., a personal judgment against the debtor. In relevant part the code section provides as follows:
"No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."
"No deficiency judgment shall lie . . . . under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property . . . . or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."
Like most states that have such legislation, California limits its anti - deficiency laws to residences i.e., "dwelling of not more than four families." Thus commercial real estate properties do not fall within the consumer protection statutes of most states.
While strategic defaults are permissible in many states, depending on the nature of the loan and property, you should consult with an attorney in your state to find out if your state has such statutes permitting strategic defaults and whether or not the statutes apply to you.
So if your personal residence is "underwater" in the state like California and it is secured by a "purchase money" loan, you can safely "walk away" from the mortgage and its financial obligation without fear of being sued by your lender.
Once you made this determination, that you are in an anti - deficiency state and that the anti - deficiency statutes apply to you, your next decision really is one of personal choice. Do you love the house? Do you think the market will recover? Can you afford your mortgage payments?
It is certainly nice to know that you do have choices. However, be clear not everyone can simply "walk away" from their mortgage. It is best that you seek legal advice from a competent real estate attorney in your state before you make the decision to "walk away."
Interpretation of anti - deficiency consumer protection legislation can be tricky and I strongly advise that you seek legal advice from a competent real estate attorney in your state before you make any final decision to "walk away" from your home.
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Want to find out more about walking away from your mortgage, then visit attorney Mitchell Reed Sussman's site on how to "walk away" from your mortgage without being sued by your bank.
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