Strategic Mortgage Default

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What Is a Strategic Mortgage Default?

Strategic mortgage default refers to a deliberate, intentional decision by a homeowner to skip one or more mortgage payments. This will lead them into “default” status with their mortgage lender, which can in turn place the ownership of their home in jeopardy.  Strategic mortgage default almost always occurs due to financial hardship of the borrower. They may already be behind on mortgage payments, and may be “pushing their luck” when it comes to remaining on good terms with the lender. 

Does Strategic Mortgage Default Have Consequences?

In most cases, strategic mortgage default results in a risk of a foreclosure proceeding. Many mortgage lenders have policies stating that foreclosure will occur after a certain number of defaults or missed payments. Also, any type of mortgage default, whether strategic or not, can negatively affect the borrower’s credit (mortgage default is usually reported immediately to credit agencies). 

In cases of severe default, the lender may pursue legal action against the mortgage borrower. This can result in a forced sale of the home. However, the person will usually have some time before they have to move out of the  home, and the lender must always give notice that a foreclosure proceeding is being pursued. 

Are There Any Advantages to Strategic Mortgage Default?

In some cases, the lender may actually allow the borrower to strategically default on single payment. This can happen if there are exceptional circumstances that cause them to be financially “off” for a month. Some lenders may allow a grace payment or a grace period (in other words, they might allow a missed payment). This will allow the person to remain in good standing with the lender, rather than forfeit their entire contract.

However, not all lenders are willing to do this with borrowers. Repeatedly defaulting on mortgage payments does not usually sit well with lenders. On the other hand, some lenders may be willing to allow the person some time to regenerate funds, especially if they are able to make good past mortgage debts in order to save their home. Strategic default can sometimes be used to create a space in which the person can obtain refinancing if it is allowed. 

Lastly, states have very different laws in terms of what lenders can and can’t do in response to strategic mortgage default. For instance, there is a distinction between recourse debt and non-recourse debt. With recourse debt arrangements, the lender can sometimes collect on the person’s property and assets if they miss a payment, whereas they can’t do so in a non-recourse debt arrangement. Most mortgage arrangements are non-recourse in nature, meaning that foreclosure is typically the only option. 

Do I Need a Lawyer for Help with a Strategic Mortgage Default?

Understanding how mortgage defaults work can sometimes be difficult to do.  This becomes even more complicated when dealing with intentional defaults. You may wish to hire a lawyer if you need help with any mortgage or real estate issues. Your lawyer can provide you with the appropriate legal advice for your situation, and can represent you during a formal lawsuit if necessary. 

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Last Modified: 03-03-2014 12:56 PM PST

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