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Is Strategic Default Right For Me?

A strategic default is a strategic business decision to discontinue paying on a loan when it no longer makes financial sense, i.e. when a property declines significantly in value.   Many people ask us if strategic default is the right choice, as it is common to feel guilty abandoning a property.

Ask yourself the following questions:

1)     Would you purchase this same property today for the amount currently owed on it?

From a business viewpoint, an investment in a home is not unlike an investment in stocks, bonds, or mutual funds. Would you feel some sense of moral obligation to hold onto one of these investments while watching its value precipitously decline? If you make a bad investiment, cut your losses as soon as possible and sell. You can easily rent until the market recovers, and then buy another home–or theoretically the same one–for its true market value.

2)     Whose interest do you choose to protect–your family’s, or that of some huge lending institution?

Remember that your lender drew up the contract that you both signed. This contract spelled out the exact steps to be followed if you defaulted on your payments. Lenders, plus their teams of CPAs and attorneys, calculated this risk and incorporated it into the interest rates that you and other borrowers were charged. This was a financial transaction, not a marriage, lifetime emotional commitment, or honor-bound pledge. No one forced the lender to sign that contract. Indeed, they designed it to protect their interests, not yours.

Rest assured that lenders don’t hesitate to exercise their right to take a person’s home if it’s in their best interest to do so. Concerns of morality or social responsibility are not part of the equation. You took a risk as well as the lender. When lenders suffer a loss, they turn to the federal government for a bailout. Where do you turn? Who protects you?

3)     Does it make you feel like a bad person to consider walking away from your mortgage?

Bank officers and payment clerks often attempt to make you feel like some sort of criminal or immoral deadbeat when you fall behind or stop making your mortgage payments. Why? Because they want your money. Period! And yet banks walk away from huge investment properties all the time if it serves them to do so. This is the nature of their business and they understand how the system works! It’s to their advantage if you do NOT understand how the system works.

Law Professor Brent White of the University of Arizona wrote a brilliant paper entitled, THE MORALITY OF STRATEGIC DEFAULT. Following a careful analysis of the situation, he says,

“Morality and emotions have no place in one’s decision to strategically default on a mortgage. Forget about shame and guilt. Don’t worry about your credit score. If you owe more than your home is worth, stop paying your mortgage and walk away.”

The abstract of his paper concludes:

Responding to those who argue that homeowners who strategically default on their mortgages are immoral and socially irresponsible, this article argues that breaching a mortgage contract is not only morally acceptable, it may be the most responsible course of action when necessary to fulfill more important obligations to one’s family.