Strategic default is a choice not to pay a commitment because the consequences are less than the benefits. On a mortgage, you might weight that losing your house, declaring bankruptcy, causing neighborhood blight, or hurting your credit is a decent compromise for months of free rent and a cashflow increase.
Why do people know about strategic default?
Strategic default was widely discussed when it first came up in the depths of the Great Recession. At that point, it was a relatively common - and everyone had an opinion.
Where people fell – and fall – boils down to a simple question:is it okay to welch on a financial commitment?
Around that time Pew polled Americans about 'walking away' from mortgages in a strategic default. The results, as always, are interesting to parse – let's get into it.
Is Strategic Default on a Mortgage Okay?
An underwater mortgage happens when a borrower owes more on a mortgage than the value of the underlying house.
In this scenario, the borrower can, of course, keep paying. However, if it looks hopeless - this is where a strategic default can come into play.
In a strategic default on an underwater mortgage you might simply mail your bank the house keys (well, and stop paying monthly payments).
Laws on walking away vary by state- some states, such as California, offer banks no recourse on borrowers that walk away.
If strategic default is worth it is a complex calculation. There is a credit hit, and you obviously need to find a rental property for less than your mortgage payment. However, it may make economic sense if your cash flow improves due to the default. Even with the hit your future wealth might improve.
What's the morality of walking away from a mortgage?
36% of people believe it's either acceptable or conditionally acceptable to walk away from a mortgage. Another 5% aren't sure. A full 59% of people don't think strategic default is acceptable.
Enough people have decided that they can live with breaking the contract... even with all of the considerations necessary.
In 2010, Pew Research polled homeowners and renters to determine their thoughts on walking away from mortgages. (Here are the cross-tabs.) Note that 21% of poll respondents with mortgages had underwater mortgages at the time.
So, if you choose to mail in your keys you might be making an economically wholesome decision. However, note that Americans pretty overwhelmingly think it's the wrong thing to do.
Of course, you need to weigh strategic default for yourself versus the negatives. Sometimes it's the best of some bad options.
