Sunday, July 10, 2011

What is a Strategic Default?

What is a strategic default?

Let’s first define strategic default in simple terms. Wikipedia says:

A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.

This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house’s price such that the debt owed is (considerably) greater than the value of the property – the property negative equity or “underwater” – and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called “walkaways.”

How do Americans feel about strategic default?

  • The number of underwater homeowners who believe it is okay to default on your mortgage if you are under financial distress has almost doubled in the last twelve months (14% to 27%).
  • 47% of people that are underwater and behind on their mortgage have considered strategic default.
  • Those who know a strategic defaulter are more likely to have considered defaulting.
  • 1 in 5 Americans knows a strategic defaulter.
Basically, as more people enter into negative equity, more will be tempted to ‘walk away’ from their mortgage obligations which will increase the homes going into foreclosure.

For more information on this and other real estate news, visit my website!

Source: KCM

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