The Strategic Default
Many years ago, during the recent housing crisis, the term “strategic default” made its way into mainstream media. Quite frequently this was the cover story on many different televised news stations.
Let us talk about what a strategic fault means so you have a better understanding as to what it is and if it is something you should consider.
According to Wikipedia, a strategic default is when a borrower stops making a loan payment even though they are still actually able to make those payments.
Why Would Someone Do This
Back in the last recession of the late 2000s when the housing industry was falling day by day for a few years, there were people who knew the value of their home was declining and knew it could take years before they would break even when the market would turn around.
At that time the borrower may still be able to make their payment and many of them were actually still making their payments. However, they saw the writing on the wall and wanted to take advantage of the downturn in the market. How could they do this, you ask?
Simple. They still had good credit at that brief moment in time because they had not yet started to go into default. Thus, they started to look at comparable homes that were not much less than what they owed. They could even qualify for a second home at that time.
When they bought another home that was similar in size and features they could then they would go into default on the first home. This was the “strategic” part of the strategic default.
The Difference from a Default and a Strategic Default
When a person who is financially unable to pay a mortgage, regardless if they owe more or not than the current value, they may go into default. This would mean they are now missing payments and thus they will begin the process of going into foreclosure.
A default is fairly simple to understand. It means you cannot afford the payment.
However, a strategic default is a planned strategy on a bad investment, even if it is your own personal residence. The strategic means you are deliberately making plans to lose the home. Many people look at this as “throwing good money after bad”.
Is It Legal
This is very open to debate as a strategic default can be seen as a way of committing fraud with the previous (defaulting) mortgagor (i.e., the bank). Plus, there could be a deficiency judgment placed upon the borrower.
Before you ever consider doing a default you should seek legal counsel. One of the things you need to look at is your state a judicial foreclosure state or a non-judicial foreclosure state. Some states, like Nevada, are both.
What Happens When You Default
Regardless if your default is strategic or not there can be and will be consequences for your decision. As with any bad debt you will have negative effects on your credit and future creditworthiness. There may be a deficiency judgment.
Before defaulting on any mortgage you must look at your financial goals in the near and mid-range future. This will require taking a look at your goals and these must be taken into consideration.