The term “strategic defaults” has been getting a lot of press lately. What exactly is a strategic default? Why is it so controversial? … and will this trend continue? A strategic defaulter is defined as someone who defaults on six consecutive mortgage payments, while maintaining on time payments of all other debts, such as car notes and credit cards. Basically, it’s someone who can reasonably afford the payments but determines that it is no longer in their best interest to continue to do so when the value of their home (asset/investment) has so significantly depreciated as to be unlikely to be recovered.
People everywhere are divided as to whether this is an acceptable strategy. Some consider this practice to be immoral. They contend that the homeowner made a promise to pay and must continue to honor this promise as long as they are able. Objectors also contend that strategic defaulters are making a tough market even tougher, further suppressing property values and adding to the inventory of foreclosed homes.
On the other side of the issue, strategic defaulters cite that they have a right to manage their investments and to cut their losses. They ask why they must continue to pay top dollar for a property that is often times only worth half the original purchase price? Why should they voluntarily “throw away” 100’s of thousands of dollars that they will not be able to recover over time…just because they can?
Of course, there is more to this controversy and the debate will continue. Your opinion will likely be influenced by your experience with our unique real estate market and with those you know who are struggling. Experian claims that the rate of strategic defaulters has “peaked” (http://www.dsnews.com/articles/phenomenon-of-strategic-defaults-may-have-peaked-experian-2010-06-28). Based on my experiences and conversations with homeowners, I respectfully disagree. Whatever your opinion of strategic defaulting, we will all need to navigate our way through it…together.
