This is an educational article about the current financial crisis and whether it is wise to “walk away” from your mortgage.
Whether a borrower can engage in a strategic default depends on whether the borrower live sin 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 is in excess of the value of the property
In many states, some form of consumer protection has been enacted by the state legislature which prevents banks from suing homeowners for deficiencies. These laws typically apply to single family owner occupied residences.
A typical example of a legislature enactment is California’s Code of Civil Procedure section 580b which 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.”
In California, the pivotal part of a strategic default is that the loan is a “purchase money” loan used to purchase his home. Thus a HELOC, home equity line of credit, does not typically fall within the California statute and to default on a HELOC will likely result in a lawsuit against the homeowner for non – payment of the balance.
Like most states that have such legislation, California limits its ant – 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.
Visit the website http://www.palmspringslitigationattorney.com for more information on this subject.
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.
If you are in an anti – deficiency state and that the anti – deficiency statutes apply to you, you will have the option to simply “walk away” from your home loan knowing that the lender will not pursue you further.
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.
Author Mitchell Reed Sussman is a California real estate attorney specializing in real estate, foreclosure and bankruptcy. He is on the web at http://www.palmspringslitigationattorney.com
Learn more about anti – deficiency legislation. Visit attorney Mitchell Reed Sussman’s site where you can find out all about anti – deficiency and what it means for you.