Strategic Default vs Strategic Short Sale

Strategic Defaults in California. People are walking away from their mortgages by the thousands, making a financial decision that it's better to take the hit on their credit score than try to recover thousands of dollars in negative equity. They're called strategic defaults. They risk being sued by the lender for the unpaid mortgage balance on any 2nd liens, HELOC loans, or Refinanced Loans. Their credit will take a huge hit, making it difficult to get a credit card or a car loan for up to 7 years, and they won't be able to get mortgages for 7 years. Under California law, banks may in certain circumstances be able to pursue a defaulting borrower. If a borrower has refinanced their loan, has 2nd or 3rd liens or HELOC loans, they generally may be vulnerable to suit by their bank. Think About the Strategic Short Sale Alternative. Recent changes in California law has made it easier for borrowers to protect themselves from future lawsuits if they complete a short sale. SB 931, which generally states that if a first mortgage lender agrees to allow a homeowner to complete a short sale, the lender will not be able to turn around and later file a lawsuit against that former owner for the difference between the amount owed and the amount the property sold for. SB 458 generally gives the same protection for homeowners with a second or third mortgage lender, refinance lender, or HELOC lender. Want to know more about a strategic short sale and other options for distressed real estate.

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January 22 2012 - Los Angeles
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Profile picture for SoCal Engr
Is "Strategic Short Sale Alternative" the phrase-de-jour?

Somehow, the term "strategic" doesn't seem to apply to short sales. In a strategic default, the decision lies with the owner. They have the ability to continue with the payments, but choose to default based on a a logical decision regarding future financial impact.

In a short sale, the ultimate decision lies with the lender - so it seems applying the term "strategic" is simply a balm to the upside-down owner. While a short-sale is definitely an option an upside-down owner may consider pursuing, this seems like just another spin to enhance the marketability of short-sale vice default.
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January 22 2012
Profile picture for hpvanc
What do you use as the hardship for the bank to consider in strategic shortsale?  Don't lenders insist on a verifiable hardship when considering whether or not to approve a shortsale?
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January 22 2012
Profile picture for shasta_steve
[Removed by Zillow moderator] I think forwarding this sales pitch to your local real estate board would be a great start. Yes it does happen a lot but people are rarely so brazen to put it on an online blog where the whole world can see just what the ethics of the real estate industry really are.  

The rest of this dribble is misleading at best.    Wow where to start.  First off for a "strategic short"  to work all those creditors would actually have to sign off on it.  Very unlikely if they are not going get any money out of the deal and in most cases of underwater houses only the first is going to get anything.   As far as foreclosures in California if the money was purchase money and never refinanced then the borrower has nothing to worry about.  If they loan was refinanced and that lender is the the one who forecloses the borrower has nothing to worry about unless the bank judicially forecloses and you have a much better chance of getting hit by lightning that happening. 

In the end all this is a creepy sales pitch designed to make the agent money.  Do you really want to put your financial future on the line with an agent who has no eithics and do you really belive they have your best interest at heart?
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January 22 2012
In some situations, it is just better to walk away!
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January 22 2012
Profile picture for shasta_steve
Socal and hpvanc "strategic" shorts happen all the time in California.  I don't begrudge any homeowner for doing what is in their own best interest but I am angry about how the real estate industry has pounced on this.  It shows instead of truly trying to help or in anyway being the ethical industry they claim to be, many make the sterotypical used car salesman look like saints. 

My problem is not so much that they happen but how agents market short sales here with half truths and outright lies.  It is very common for me to get a knock at the door from an agent trying to find out if I am underwater and how they can "help".  When they do convince a homeowner to try and short sale they almost always price the home way under market and way under what the bank will actually accept.  They do this to drive business but what they really do is hurt others trying to legitimately sell houses because of the unrealistic low price on the house.   They are also in a sense lying to prospective home buyers  but with the current ethics in the industry I don't really think they worry too much about that. 

In the end agents push short sales because they make agents money, nothing else.  All this crap about how they are here to help is just that.  I know there are good agents out there but there are lots of bad ones too and if you read this forum much it does not take long to realize that.
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January 22 2012
shasta steve. Common Steve take it easy on us. This topic is all over the internet. Banks will do what's in their best interest as homeowners will do for theirs. If it makes sense for both parties it is alot better to negotiate with the bank and give them some participation than to just walk away and not know whats going to happen.  We don't knock doors initiating the idea. We have clients that really want to get out of their house and move but they're trapped. Bottom line if it makes sense for the bank to short sale the house over foreclosure they will accept it. If it doesn't they will deny it. It is much better for the homeowner to have a mutually agreed upon settlement than a default. And yes we make money, but believe me it is four times the work for the same pay. Believe us we do not chase this business it is time intensive and has a 50/50 chance of failure.
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January 23 2012
Profile picture for shasta_steve
Actually I am happy you posted.  I have saved your post and your contact information and will be using it often when agents try and point out the ethical standard they are held to.   The rest of your original post was nothing more than a sales pitch and really how is that any better than knocking on my door other than you get a much wider group of people to deal with.  

As far as your original post you skirted the truth there too.   All the new legal protections do is basically make them the same as a foreclosure in California.  There were too many snake oil salesmen, I mean agents, who talked their clients into short sales only to later find out the bank slipped wording in that made them still liable for the money.  Something that would not have happened if they had just foreclosed.  In California if the loan is purchase money and not refinanced the bank can ONLY take the house.  If the bank forecloses and does not do a judicial foreclosure they have no right to go after the homeowner because of our one action rule.  They never do judicial foreclosures. 

Anyway I thought it was against the rules for agents to give legal and financial advice?  
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January 23 2012
If the bank agrees to a short sale everyone wins!
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January 23 2012
A couple of posters have said that sometimes it is better to just walk away.  I can't imagine what situation that might be unless you have a paying job in a different location forcing you to move.  Short-sale *is* strategic default, and during strategic default, the homeowner enjoys "free rent", so it should be a very compelling reason to leave free housing.

It is rare that short-sale is truly better for the homeowner.  One big clue is that banks prefer short-sale over foreclosure.  Anyone that believes lenders agree to short-sales out of some wish to benefit the underwater homeowner is seriously deluded.  Banks are in the business of making money with money, and they have analyzed every outcome.  If lenders like short-sales, it's because short-sales benefit the lender.
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October 18 2012
Profile picture for cathcoy
John Scillitani wrote:  Their credit will take a huge hit, making it difficult to get a credit card or a car loan for up to 7 years.

Actually, here are the "credit seasoning" requirements for various defaults--not quite 7 years for short sale.  I doubt it'll take 7 years to get a car loan or credit card, either.

https://www.fanniemae.com/content/announcement/0816.pdf
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March 19 2013
 
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