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.

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Source: KCM