There are two sides to Strategic Default

As Strategic Default gains popularity among home owners; more questions are raised.

by Dan Krell © 2010.

Imagine, if you will, having the ability to separate yourself from your most troubling problem: a burden so great, you cannot sleep at night; a hardship so severe that it interferes not only with daily living, but family relationships; a misfortune so cruel, it causes daily misery.

No, this is not the “Twilight Zone,” but it must be how some home owners feel about owning a home with negative equity (the mortgage balance is higher than the value). The reality is that 41% of home owners recently interviewed for the “Trulia Realty Trac Survey: American Attitudes toward Foreclosure” (May 20, 2010 Truliablog.com) indicated that they would walk away from an upside-down mortgage.

Recently, a home owner confided to me of their regret of missing an opportunity for a strategic default. Now their options are very limited. Although they have been paying their mortgage in a timely manner, their plan was to downsize and then walk away from the larger mortgage.

According to nationally featured Youwalkaway.com (a website that advocates taking “financial control”), there is a distinction to be made between “walking away” and “strategic default”; the distinction is basically about the ability to make the choice. Walking away describes what financially challenged home owners do when they have no other option; whereas strategic default is when a financially sound home stops paying their mortgage because they decided that the consequences of foreclosure is an acceptable part of their long term financial plan.

If strategic default doesn’t appear to be the epitome of self importance in a world reeling from financial abuses, Freddie Mac Executive Vice President Don Bisenius (in a May 3rd Freddie Mac news report; FreddieMac.com) offers another view on the issue. Although he explained that strategic default is a personal choice, it usually does not take into account of externalities (“spill-over” effects). In other words, Mr. Bisenius explains that the person considering strategic default typically has a narrow focus and ignores the consequences of their actions on their neighbors and their community. In addition to becoming an eyesore as well as attracting unintentional animal and human activity, foreclosures have the potential of bringing down home values ultimately costing neighbors and the community financial and emotional capital.

Certainly, the consequences of not paying your mortgage are dire. Among which include: losing your home, negatively affecting your credit, and the possibility of being sued by your lender (state laws differ on deficiency judgments). Clearly anyone would be affected by these consequences; however some believe that the personal long term benefit far outweighs any consequences.

There is the growing ethical and moral debate about strategic default. Although for some home owners, “walking away” is the final chapter of failed attempts at mortgage modification and short sales; while for others, it is a deliberate maneuver to attempt to cut their short term losses in the belief that they are better off in the long run.

Since the long term benefits of strategic default is tied to future events, it may be possible that we may one day determine that the hedging against our homes and communities for a short term personal gain was “short sighted” due to the long term personal and collateral losses; which, in the end may say more about a person than their financial savvy.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 7, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.