What Is a Strategic Default?

Strategic default means that you default on your mortgage because you are following a financial strategy rather than being unable to make the payments. If your house is worth less than your mortgage, you may develop a strategy where you gain a financial advantage by defaulting, waiting for foreclosure and then making other living arrangements with an impaired credit rating, but substantially reduced debt and payment obligations.

Historically, as you paid down your mortgage, your equity in your property increased. If your house price drops a substantial amount, the mortgage you used to finance the purchase may be much larger than the new, lower value of the house. In this case, your mortgage payments don't result in increased equity and, if you sell your house, you will still owe the bank money. People for whom this does not make sense develop a financial strategy to default on their mortgage and resolve a situation that they find unacceptable.

To employ a strategic default successfully you must develop a plan for the time, which could be up to three years, when you will not be able to borrow because your credit rating will be damaged. Some homeowners put the default behind them quickly by notifying the bank and turning over ownership of the property. They can then rent an equivalent house for less money and, when their credit rating has recovered, purchase another home for a lower price with a smaller mortgage.

Another alternative is to simply stop making the mortgage payments and continue to live in the house until the bank forecloses. In some states, foreclosures in 2011 take up to two years and even longer if you contest the foreclosure action. This strategy allows you to save the mortgage payments and accumulate a substantial down payment for a new, comparable house at a lower price.

A key to a risk-free strategic default is to investigate whether your state is a recourse or non-recourse state. Recourse means that the bank can sue you for the balance of the mortgage after your house is sold. Non-recourse means that when the bank takes your house, the mortgage is considered to be paid off.

Banks in recourse states have not generally made use of the right to sue because it is expensive to go to court, and defaulters usually have few assets. There is a risk that this may change if many defaults are strategic.

The other major consequence of a strategic default is that your credit rating declines 21 percent on average. With a good score to start with and no other problems, the credit score can be reestablished within two to three years.

Other than the possibility of the bank suing you in recourse states, there are no other legal entanglements from strategic default. The bank often will not be able to determine whether your default is strategic or not, since it may not have much information about your personal finances. The percent of defaults that are strategic is unknown and estimates range from near zero to 35 percent.

The factor that is keeping many homeowners from defaulting strategically is a moral attitude of keeping your word and fulfilling your contracts. If a homeowner believes in fairness and honesty, he will be hesitant to stop making his payments if he can afford to. Homeowners who feel that their bank has dealt with them unfairly are less likely to have these scruples.

What is Strategic Default? Florida Foreclosure Defense Lawyer
www.foreclosuredefenseflorida.com/...Talk-on-Strategic-Default.aspx
Tough Talk on Strategic Defaults. An article by Brett Arends in the The Wall Street Journal talks tough about strategic default and recommends that underwater ...
Strategic default - Wikipedia, the free encyclopedia
en.wikipedia.org/wiki/Strategic_default
A strategic default is the decision by a borrower to stop making payments (i.e., to default) on a debt, despite having the financial ability to make the payments.
What is Strategic Default? Sarasota Foreclosure Defense Lawyer
www.sarasotaforeclosurelawfirm.com/.../What-is-Strategic-Default.aspx
Strategic Default Attorney Thinking About Walking Away from Your Mortgage? A strategic default begins with a decision by a homeowner to stop making payments
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Jul 09, 2010 Strategic default is the financial decision to "walk away" from your underwater mortgage, even if you have the money to continue paying it. Many
Strategic Default: Is It OK To Walk Away? Bankrate.com
www.bankrate.com/finance/real-estate/strategic-default.aspx
For some homeowners who walk away, strategic default is a business decision, not a moral failing.
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www.balancedscorecard.org/.../tabid/55/Default.aspx
The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations ...
Strategic Default: Is It Fraud? What Will Happen In Foreclosure ...
www.youtube.com/watch?v=Cqflv5klm9U
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Strategic Default - What Happens If You Stop Paying Your
ezinearticles.com Real Estate Foreclosures
Jun 14, 2010 Millions of American homeowners are walking away from underwater mortgages, utilizing the process of strategic default. Millions more are considering it.
Strategic Default Should you stop Paying your Mortgage?
www.strategicloandefault.com
Should You Stop Paying Your Mortgage? We can help answer all your questions about how to strategic default and if it is right for you.
The Strategic Default Monitor
www.strategicdefault.org
StrategicDefault.org is the original online website providing free walk away and strategic default advice. The Strategic Default Monitor