Strategic Default was a term coined during the 2008 Great Recession describing homeowners who stopped paying their mortgages but continued to occupy their house or collect rents from their investment properties. They could live in the house or collect rent without having to pay the mortgage. See my 2009 article on that subject.

While more common in residential houses, it also occurred in commercial properties where apartment or strip mall owners would stop paying the mortgage (and some stopped paying maintenance vendors and employees) but continue to collect rent. Foreclosures were backlogged due to an overburdened legal system so that the property owner could enjoy free housing for years. There was one homeowner rumored to live in Las Vegas who purchased a home with “no down payment” and lived completely free for five years.

Now it’s the renters turn to strategically default. Of the 110 million Americans living in rental households 20 percent are expected to not pay rent due to COVID. A federal rent moratorium prevents evictions for an estimated 12 million renters who are not paying rent. States, counties and cities also enacted their own rent moratoriums. For example, California freezes all evictions until September 30, 2020 but could extend that to the end of the year. The renter will have 12 months to repay the back rent once the moratorium is lifted.

But in California, the eviction courts will be unable to process the backlog of evictions in a timely manner. Most of the judges, when they return to work, will be adjudicating priority cases such as criminal cases which take priority due to the Constitutional right “to a speedy jury trial”. With few judges allocated towards eviction, the trials will be postponed for months.

Renters who cannot pay “regular” monthly rent during the eviction moratorium will owe back rent, which will need to be paid back some day. But they will not be able to afford to pay regular rent plus back rent. Those renters who cannot afford to pay rent are generally in deep financial trouble and are deep in debt. They will be evicted and stuck with a large back rent debt, and other debts, with their best option to file bankruptcy which will discharge all their debt. Thus, they will have effectively lived rent free for a year or longer.

About Stout Law Firm

James Stout has practiced law in Orange County since 1995 and is highly regarded by the business community. He has passed three bar exams, California, Arizona and Nevada.
This entry was posted in Economic Trends, Foreclosures Short Sales Mortgage Litigation. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s