For a time, it was almost fashionable for a homeowner to make a ‘business decision’ to intentionally default on his mortgage when a home was worth less than was owed on it, even if the homeowner had the means to make the payments. Some homeowners decided it made more financial sense to walk away from an under-secured loan than to continue sinking money into a devalued asset. The practice of walking away from a mortgage in this fashion has been referred to as “strategic default.”
From a strictly business perspective, strategic default could be described as a decision to stop throwing good money after bad. However, as homeowners learned, the decision is not without consequences, in addition to the negative impact on credit scores.
While business owners and managers make difficult investment decisions regularly, with an eye toward preserving and promoting business objectives, there is another determining factor at work in our personal lives influencing the decisions we make: Social pressure. Foreclosure still bears a measure of social stigma and anxiety.
An in-depth analysis of the effects of social pressure on underwater borrower’s decisions suggests:
“[M]ost homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.”
The study explores the social stigma of home foreclosure and the emotional wrangling people undergo when deciding whether to stay or go.
Besides the social and emotional impacts of foreclosure, a homeowner must consider that even if he walks away from an underwater first mortgage and is protected from a deficiency judgment by California’s anti-deficiency statutes, the second mortgage lender, if any, may file a lawsuit against the homeowner seeking a deficiency judgment. A homeowner may end up paying the unsecured balance of a second mortgage, plus fees and costs, for a home he no longer owns.
If you are a lender whose portfolio includes junior liens, be aware of your option to obtain a deficiency judgment against the borrower in the event of default and sell out by a senior lienholder. The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.