When I wrote the post What is “Strategic Default” and Should You Consider It?, I was tough on those who have used this tactic.
First, a definition: Strategic Default, according to Wikipedia, 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.”
A brief summary of this post: I recommended “Don’t do it” for the following reasons:
- It is short sighted…getting out at the bottom of the market could backfire if the market rebounds.
- The lender will come after you (if you don’t live in a non-recourse state).
- You will trash your credit.
- You signed up for the ride.
I closed the post with these words:
“I am not unsympathetic toward those whose homes have plummeted in value during the recent recession. Many have simply been dealt a bad hand. However, true character is defined by how people respond to difficult times. A strategic default is a fancy term for intentionally breaking a contract because it doesn’t suit you at the time. I wonder: what else would you also bail out on when things don’t go well?
Hopefully, you don’t want to find out. Do the right thing now so you can stand tall in your own eyes. That is your only choice.”
I recently received the following comment which is causing me to have second thoughts.
“I live in S. Florida and am 123% upside down. I paid $223,000 in 2005 and a house 3 doors down just sold for $100,000. I will never make that money back (including my $50,000 down payment).
When I bought my first home in 1996, the bank practically wanted my DNA to get approved. The amount of hoops and fact checking was absolutely amazing!! The banks threw their strict lending practices right out the window and caused the housing bubble which eventually collapsed.
Are you telling me that as a 46 year old man that I have to mortgage my entire future to pay for the problem the banks caused?
I signed a business contract and the deal was I pay the loan or they get the house. I’m defaulting and they are getting the house! It’s nit my fault the house is worth less, it’s the banks! They caused the problem!”
Why the second thoughts?
His last paragraph. I confess that I hadn’t quite considered a mortgage in this light: “A business contract“…”I pay the loan or they get the house.”
Invitation for comments: Does my reader have a valid point? Have I been too harsh on those who opt for strategic defaults? Does blaming the bank (or any other entity) justify a strategic default? Are there moral principles involved, or is this simply a business decision…no more or no less?