What is “Strategic Default” and Should You Consider It?

by Joe Plemon on May 3, 2010

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.”    This practice is particularly associated with residential and commercial mortgages in which, because of a substantial drop in the value of the real estate, the property is worth less than what is owed against it and is expected to remain so for the foreseeable future.

According to a recent study by the Chicago Booth/Kellogg School Financial Trust Index, nearly one-third of all current mortgage loan defaults are considered strategic.  This number has increased from 22% in March, 2009.

How can this be?

Did you get that?  ONE-THIRD of mortgage loan defaults are by people who can afford to make the payments but choose not to.  How can this be?

One reason, according to the study, is the increasing perception by borrowers that lenders are less likely to go after borrowers who walk away.  The study indicated only 54 percent of homeowners believe the lender will pursue the borrower, compared to 56 percent only three months earlier.   The likelihood of strategic default increases by 23 percent when homeowners learn that a neighbor with negative equity has received a partial loan for forgiveness.

A quick summary

Here is my understanding: home or business owners have borrowed money against their property and now, when the property has lost value, are reneging on paying the loan, even if they can afford it, because they believe the lenders will not pursue them.

Is this a strategy to consider?

I say NO for the following reasons.

You are being short sighted.

Your house is an investment.  Millions have learned from this recession that real estate investments, like mutual fund investments, can go down in value.  Many who saw their 401(k)s plummet in value panicked and bailed out at the very worst time: when prices were low.  Don’t do the same with your house.  No one knows when real estate values will rebound, but historically houses have appreciated in value.  Getting out when at the bottom of the market is not strategically savvy.

Your lender will come after you.

Don’t think that walking out will somehow magically make your life better.   Maybe nothing will happen immediately, but you had better be looking over your shoulder.  Mortgage recoveries, according to a Bloomberg report, rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period.  Foreclosure will eventually happen, including legal action to collect the shortfall between your debt and the sale price of the house.   This could include the garnishing of your bank accounts or your pay check.

You will trash your credit.

Foreclosure is right behind bankruptcy in great ways to ruin your credit rating.  You don’t want that foreclosure following you around on your credit report for years to come.

You signed up for the ride.

Even if none of the previous reasons can dissuade you, it is just plain wrong to not pay a debt you signed up for and can afford to make.  Keep making your payments so you can look yourself in the mirror and be proud of what you see.

Closing thoughts

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.

Readers:  Have you ever done a strategic default?  How did it turn out?  In what ways was it like or different than what I have described in this post?

What are your thoughts on the moral implications of a strategic default?

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{ 37 comments… read them below or add one }

Evan May 3, 2010 at 9:28 am

“Your lender will come after you.”

They WILL trash your credit, but they may not be able to come after you if you live in a non-recourse state.

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joeplemon May 3, 2010 at 9:37 am

Evan,
Thanks for keeping me (and my readers) on our toes. According to WikiAnswers, the following are non-recourse states:

Alaska, Arizona, Arkansas, California, Colorado, District of Columbia (Washington DC), Georgia, Hawaii, Idaho, Mississippi, Missouri, Montana (if non-judicial foreclosure is used), Nevada – (lender can get a deficiency judgment), New Hampshire, Oregon, Tennessee, Texas (lender can get a deficiency judgment), Virginia, Washington and West Virginia.

The following states allow non-judicial foreclosure:

Michigan, Minnesota, North Carolina, Rhode Island, South Dakota, Utah and Wyoming.

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Evan May 3, 2010 at 9:47 am

I only know enough to be dangerous LOL

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The Biz of Life May 3, 2010 at 11:21 am

It may be legal, but it’s ethically shady in my book, and short-term oriented. Housing is a long-term investment (some people might object to calling it an investment), and you have to ride out the cycles. Nothing goes up or down in a straight line.

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joeplemon May 3, 2010 at 3:00 pm

Biz,
It is amazing that many people base their morals on what is legal, justifying their actions by saying, “If it is legal is must be OK.” What an unstable standard! The word “default” means “Failure to perform a task or fulfill an obligation, especially failure to meet a financial obligation”. This, as you say, is ethically shady whether it is legal or not.

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dean December 20, 2011 at 9:24 am

Joe<
I am curious, what is your position in life and your financial status? And where were you when the the big banks and government defaulted on the American people?
It is very easy to sit in judgement of someone when you have not walked a mile in their shoes.
Strategy is defined as a plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result. An end to a means.
You can stand on a stack of bibles and spout your opinions of what is in the bible. It is still only your interpretation.

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dean December 20, 2011 at 9:27 am

Judge not lest thee be judged.

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joeplemon December 21, 2011 at 9:34 am

Dean,
You can read much about me by clicking the “About” tab on my site. Basically, I am a retired engineer living in the same house my wife and I bought 40 years ago for $15,000. We have spent much more than that on it over the years, but our plan is to live here the rest of our lives. You may be interested to learn that your comments and others have caused me to question my stance on strategic defaults. I wrote this post asking my readers my readers if I was too touch on my Strategic Default stance. They responded with some great thoughts.

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Evan May 3, 2010 at 3:57 pm

Just throwing it out there to be a pain…but isn’t “ethical” however you want to derive it from unstable? How many people died in the crusades? how Many native Americans were killed? How many Jewish business people were treated unethically (not even talking about being killed) in Eastern Europe during the 30s and 40s?

Sorry just being a pain

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joeplemon May 3, 2010 at 5:49 pm

Evan,
I never consider you a “pain” but I am not sure where your comment is headed. Are you saying that all systems of ethics are unstable? If so, I would respond by saying that I believe the bible is not unstable. It is what it is and will not change like the law of the land (which I sited as unstable in a previous comment). However, even if the bible is perfect, people aren’t. So imperfect people are prone to twist truth to make it what they want it to be. The trouble with the Crusades, for example, was not the bible; it was the people who misconstrued it to mean something never intended.

OK. I might have ventured far askew of what you were asking. My point is that it is possible for sources of ethics to be stable, but imperfect people still mess them up.

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Evan May 4, 2010 at 3:45 pm

Are you saying that all systems of ethics are unstable?

That was what I meant, or more accurately, as humans change so do what we consider ethical. I disagree with your Bible comments though. You would know better than I, but aren’t there a multitude of punishments throughout the bible that we would consider unethical or barbaric?

I do agree, that there underlying message of the New Testament is still intact 2,000 years later.

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joeplemon May 4, 2010 at 5:11 pm

Evan,
“I do agree, that there underlying message of the New Testament is still intact 2,000 years later.”

That was the point I was trying to make, so we agree here. While one might or might not agree with the bible (or New Testament) as a system of ethics, the point is that it is stable…unchanging…intact after thousands of years.

I agree with your assertion that people change. Cultures change, morals change, values change. This is the very reason why I think it is important to have an anchor to base our values on…something that doesn’t change. Without that anchor, we could drift anywhere.

You also make a good point about some savage punishments (mostly in the Old Testament), so one would need to examine what is being said and taught in those instances. Even if the decision is not to believe the bible is a good system of ethics, my contention is that it is stable.

Thanks for the great discussion. I always appreciate your thoughts.

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Edward May 16, 2010 at 10:02 pm

This financial crisis and all that it entails is the major result of the Federal Government demanding improper activity of the banks and other lending institutions as a way to get less fortunate people into homes beyond their means even though it was quite obvious that they could not afford them and would eventually lose them. The Federal Government has been involved in guaranteed loans which I witnessed first hand in Mattipan Massachusetts. Ethic minorities could get loans where others could not. To the realtors it was a good thing that they could sell homes but the buyers eventually defaulted. Why should anyone expect the results to be different now? But it goes beyond the Federal Government because the Supreme Court has an extreme diffculty following the guideline of the Constitution of the USA. Because these basic guidelines are not adhered to we have a runaway deficit, fnancial crisis and a bullyng government. Until we have a responsible Supreme Court we will never have a responsible Federal Government. Enjoy the high taxes and paying for the misfortune of others. I can only express that it is unwise to spend money you don’t have. It is unwise to split the job market among the races and sexes and sexual orientation. I have seen people lose their jobs and homes to diversity and redistribution of wealth. When you do these things……………you get this.

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joeplemon May 17, 2010 at 1:46 pm

Edward,
I don’t disagree with your understanding of the cause and effect of the widespread foreclosures. But this post is not about getting “less fortunate people into homes beyond their means even though it was quite obvious that they could not afford them”. Strategic default is about those who CAN afford to make their payments but choose to walk away, usually because the property has diminished in value. Strategic default, in my opinion, equals character default.

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Edward May 17, 2010 at 6:20 pm

Hello Joe,

I understand what you say about this being about people who “can afford to pay but choose to default” but it is my opinion that everything is interrelated.

If the government had not advocated or coerced the financial institutions into making these highly risky loans this housing crisis most likely would not have happened.

Diversity caused many qualified and respected people to lose their jobs. They were replaced by people who were chosen for their race, sex or sexual orientation. I know because I was there seeing it happen. Worse was when it happened to me. The people in many cases had to be found…meaning that alternative sources had to be used to help find candidates for the positions. Those who had jobs and lost them…had mortgages. Even though they lost their jobs they were still obligated to pay the mortgages. They should pay until all their funds are exhausted and then lose their homes.

The courts have created “Protected Class” people which means in general terms that even if the diversity candidate was a poor choice or under performer they are protected from job loss. As a consequence companies are moving out of the country and many are taking their well paying jobs with them. The employees who remain have mortgages that have to be paid. Under your concept each should pay until they have exhausted all their funds then lose the home….because they still have the means to pay.

Recently the government created a law requiring all people in the US to have insurance. Seen the price of insurance lately? Many people will not be able to pay their mortgages if they are forced to buy insurance. In the mean time they should pay their mortgages and exhaust their funds until they are no longer able to because they are now required to buy insurance.

I met a man last year who had a home and a mortgage. He had been unemployed for a very long time. He spent $60,000 over the years maintaining his insurance. He no longer can afford his insurance and his home is gone. He now has neither.

The government is out of control with its spending that a VAT tax is just down the corner. The deficit will reach $13 trillion in about 7 days from now. It is my opinion and the opinion of several experts that at $20 trillion our economy falls off a cliff. T minus 5 years and counting. My calculation is May 15, 2015. Also along tax lines I see a multitude of new taxes and increased taxes. My own property has just faced a $500 view tax even though I don’t have a real view until December and it ends in March.

Again, I know that the discussion is about people who walk away from their homes, mortgages and responsibilities but if you talk about one you need to talk about the others. Everything is interrelated.

People are getting frustrated. Unemployment is at 10% which means probably 20% because if you are not collecting you are not counted.

In the movie “Scent of a Woman” the main character Al Pachino says that “there are two people, those that face the music and those who run for cover. Run for cover is better.” That is what these people who are defaulting on their loans are doing. They see the chaos coming, they see the uncertainty in front of them and a Supreme Court and Federal Government who really don’t care what you are feeling or thinking. The Constitution is laughable according to the expression of the Speaker of the House Nancy Pelosi.

I say God bless us all and if you feel that run for cover is the best choice then run for cover. In the end everything will reach a state of equilibrium. I just hope that people still have an incentive to work.

Edward

Any person with a real voice risks the wrath of the Federal Government if they speak against the government. My opinion, best run for cover. If defaulting on your loan before the chaos comes is the way to do it. “Do it!”

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Edward May 17, 2010 at 6:36 pm

I have to say something about “Character.” Character deals with who a person is on the inside.

Good character is something you can afford when you have. Other character is when you don’t have. We shall see our good character diminishing with each new action of our government and court system. Because what we have is being lessened. Our character is becoming the character we can afford. We are heading towards the character associated with fear of our courts, our government and our fellow citizens.

Where is your character at, at this time?

Edward

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Arthur @ FinancialBondage.org May 22, 2010 at 8:28 pm

Seems to me they can sue you and win. You do owe them money. So you will pay one way or another. Easy way or hard way. Your call.

This is NOT an option for a Christian. We are to pay what we owe. End of story.

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joeplemon May 23, 2010 at 5:56 pm

Arthur,
Actually, in non-recourse states, the lender may not be able to come after the borrower. But you still make my point: people who sign a pledge should do everything in their power to keep that pledge, not look for ways to squirrel out of it.

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Dean January 20, 2011 at 3:43 pm

You are in la la land. Even people that can afford to pay have toxic loans. You talk about ethics. What about the lenders that made these horrible loans and then sell them into the market to get lost in shuffle leaving the home buyer to pay a 30 year loan that bankrupts their retirement. I can afford to pay my loan each month that is now 100000 thousand do
Lars upside down with home prices still dropping. Now that the toxic second is coming due, I can not contribute to my retirement .
The banks got bailed out, I did not. And millions of home buyers did not.
You are the short sighted one. Any business in this position would bail out before it was too late. But you say that people in my position should just make their payments and shut up.
A home is an investment, you are right. Like any other investment that shows a long term negative return it should be gotten rid of and since there is no help unless you are already at least 90 days behind your credit is already screwed. And even with a short sale in many states, they are going to come after you for the deficiency anyway. What incentive do I have to stay put and throw my money away?

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joeplemon January 20, 2011 at 4:19 pm

@Dean,
Yes, I might be in la-la land. I personally do not have to make the decision to default on a loan, so it is easy for me to tell others what I think they should do. I am not in your shoes.

This being said, my point is that those who can afford to make their payments should follow through with what they pledged to do, even if everyone around them (other defaulters, banks, etc) is demonstrating less than stellar character. Two wrongs do not make a right.

You say that you cannot contribute to your retirement because your second is coming due. Correct me if I am wrong, but wouldn’t your ability to contribute to retirement be the same regardless of whether your house went up in value or down in value?

What incentive do you have to continue to make your payments? One is that you will eventually have a paid for house. Even if the value plummets, you haven’t actually lost any money unless you sell it. I might be short sighted (and I probably am), but it is possible that the market could recover. It has almost totally recovered where I live. The second incentive is to know that you have followed through with what you said you would do. Your word is good. I think that is important.

Again, I agree with you that my views are skewed by the fact that I am not in the position you are in. I may be, as you said, in la-la land. At any rate, I am not unsympathetic to your plight. I sincerely hope that you will be able to work through this and some day look back on this experience with your head held high.

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dean December 20, 2011 at 9:44 am

When I purchased my home, if I was told that it would lose half of its value in 5 years I would have ran. I purposely bought my home in a state that only had inflated real estate of 2% for stability. I came from a state that was 70% inflated. I am 54 years old and had to cash in my 401 K to pay 2 mortgages while my house up north plummeted in value. Some may call it gambling with my retirement, I call it survival. When the real estate market collapsed lost over 300,000 dollars in “value”. Now the home that I am in has lost 120,000 dollars in value. Not mention an extra set of Taxes, maint, etc.
So my question is this. Being 54 yrs old, 67% permenently partially disabled, no retirement and struggling to pay the mortgage on a house I will never own nor see any return on. And not qualifying for any help from Harp or any other program because they say my income is too high. What would you suggest I do????

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joeplemon December 21, 2011 at 10:00 am

Dean,
It seems that we are not talking about strategic default in your situation. The definition of 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.” If you had to cash out your 401k in order to make your payments, I would say that you do NOT have the financial ability to make your payments.

As to what I suggest … I don’t have nearly enough information to make any kind of recommendation, but you may be need to let your “up north” house go if you can’t afford the payments. Just curious: is that house in a non-recourse state? I assume you are renting it out now…right? Let me turn the question back to you. What are you planning to do?

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Edward January 20, 2011 at 6:53 pm

Hello Joe,

Got your email. Still disagree and doubt I will ever change my mind.

Bad government, bad policies and all the other stuff that would bend even Socrates ear is too much to take. Everything is interrelated. Best run for cover.

People—you who are thinking about walking away hear me….if you are thinking about walking away there is a probability of for good reason. Think about the pros and cons. Heck with credit rating. If you have a job you will most likely have credit. Think you won’t be able to get another house for years….think again. I would have given an ear to sell my home. People will find a way and life will go on.

Joe is a good person I am sure but his thoughts are his thoughts. I see things from how they are and you should do what your heart, mind and pocketbook tell you. Not sure, talk to an accountant. Judge the matter by the Benjamins and by what is in your own best interest. Do not think you are a bad person. That is poppycock. It is a business deal that didn’t work out. End of story.

Don’t forget to ask yourself how close are you to retirement and how secure is the American pledge to have social security there for you when your turn comes. And for retirement I hear BELIZE is the best. Not sure go to Google Images. :o) Ed

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Mari May 16, 2011 at 3:09 pm

Wow dude,
I hope no-one in real trouble financially or in over-whelming emotional pain reads what you write because:
1) What you say is not entirely accurate, especially if one lives in a non-resource state.
2) Walking away from a debt that will never recover, created in LARGE part by greedy banks, who then got bailed out by tax-payers, but refuse to play fair now (will not consider re-modifications, will not lend, etc) and who reward such immoral conduct with HUGE undeserved bonuses.
Homeowners may have simply been unlucky. Are they expected now to stay with these huge debts til the day they die for MORAL reasons. It is a business decision to foreclosure, walk away or try a short sale. One has to cut ones losses and move on

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Mari May 16, 2011 at 3:21 pm

And for me, I am now suddenly a widow and alone at 53 in NC with underwater mortage and not one family member within a thousand miles.
My father, age 81, however lives in CA, has Parkinsons disease and really, really could use my help as a nurse, and besides, I’d like to spend some time with him before he leaves this earth.
AM I immoral for wanting this?!
So don’t you and your mostly other rigid, conservative posters on this blog think you need to consider ALL aspects of a situation when judging the ethics and morality of it all?
Or am I doomed to rot here alone in NC because of a “bill” I must pay for a bunch of bricks and wood?
Come on, get real.

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joeplemon May 17, 2011 at 9:06 am

Mari,
Thanks for writing. You are correct in pointing out (as Evan did in the first comment) that some of this post was inaccurate. I erred by failing to explain that the lender may not be able to come after you (should you default on your loan) in a non-recourse state. I hope that my response to Evan will help readers see that error.

Correct me if I am wrong, but I am not sure that you would fall under the definition of strategic default (deciding not to make your payments even if you can afford to) if you couldn’t afford to move to CA to help your father and also continue to make your payments on your NC home. Because family is a higher priority than, as you said, “bricks and wood”, I certainly wouldn’t consider you being immoral if you were to do so. In fact I would encourage you to seek a way to make this happen.

Personal finance is, well, personal and I am not able to address every contingency in every post. I continue to believe that those who can afford to make their house payments should do so. However, if responding to a higher priority (caring for one’s father) would cause one to default on a loan, it is a personal choice to weigh out the positives and negatives of each option and decide accordingly.

I am hoping that you will be able to work through this tough time in your life and be able to make the choices that are good for both you and your father. Let me know how it goes.

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Mari May 17, 2011 at 10:23 am

Thanks for your post and attempt at kindness by reclassifying my situation into possibly not being defined as “strategic default”.
But the fact is, it is a strategic default. This is what its a called. Thats what it IS.
I hope I made my point in my previous posts, that you, and others on this blog ignorantly judge those who make the VERY DIFFICULT decison to walk away from a house, without having a clue as the the complex and painful reasons behind it.
There are MANY reasons to strategically default, including heavy, sometimes long term, financial reasons (which could affect ability to properly feed, clothe and educate children) . Some even, have the gall to call them unchristian, WHICH is actually very uncaring, close-minded and unchristian of THEM.
MOST people who have to choose to make a strategic default have both personal and business reasons to default.
Its regrettable that these folks could stumble across your blog and think you are an “expert”.
You only have poured salt into their wounds.

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Mari May 17, 2011 at 11:16 am

Also, you flatly state in your article, the consequences of strategic default as if they are undisputed fact.
I met with a CPA here in NC and who was much more foreward thinking.
Your first point- Being short-sighted:
Many people, who are 100-200 K underwater, by often simply making the “mistake” of buying at the wrong time, will NEVER re-coup the value of their homes. Sitting it out is an exercise in fulility and not strategically savvy. They will never “own” a house. If they manage to, they will have NO retirement and very likely nearly destitute in their golden years, and possibly become a burden to society. Is this good?
Second point: Your lender will come after you.
We have already pointed out this statement is wrong for non-rescourse state. It make me concerned you may have not been keeping up with things. If you were on the cutting edge of this issue you would also realize that banks are so overwhelmed with work, thay these days they actually may not choose to come after the borrower. Its not worth the time and legal expenses. Plus, it possible to be able to afford one’s mortgage, but have no money otherwise. So what are they gonna get out of an otherwise insolvent person? And if one is insolvent, there is a form that a savvy CPA can fill out to show to the IRS, so borrower does not have tax hit either.
3) You will trash your credit. Yes credit will be dinged. But NOT trashed. The more accurate truth is that foreclosure is damaging but so many folks are defaulting these days, its not the end of the world, and credit can come back before you know it.
I am sorry sir, but perhaps you are the short-sighted person here.
Your words:
“Even if none of the (above) reasons can dissuade you, it is just plain wrong” to make blanket statement as you have. Stop making damaging and incorrect statements, and also have the integrity to clear and post this comment, “so you can look yourself in the mirror and be proud of what you see”.

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Dave November 9, 2011 at 12:57 pm

I’m a bit amazed at the blatant rationalization (i.e. “family comes first”) offered to support strategic default, AKA not honoring your word.

This is exactly the same lame excuses which realtors, mortgage brokers, appraisers, lenders COULD offer to explain why THEY engaged in their misdeeds (e.g. “hey, I’ve got a family with mouths to feed, too”).

Sorry, but all such excuses (e.g. “I’ve got a fmaily to feed”, and “everyone else was doing it”, blah-blah-blah) don’t fly with anyone’s Mother, who always said, “If everyone was jumping off a bridge, would you do it, too?”

Replace Mother’s words as coming from God, and you’re getting closer to the issue.

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John Summers November 12, 2011 at 8:45 pm

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!

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joeplemon November 16, 2011 at 12:31 pm

John,

Thank you for expressing your views and your situation. You help me to see the other side on strategic defaults. Because of your comment, I wrote: “Reader’s Input Requested…Am I Too Strict on My Strategic Default Stance?” Feel free to check it out and comment.

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dean November 18, 2011 at 4:37 pm

Joe,
I am amazed at the reaction of people that say you made a deal now live with it. ANd they are saying that a home is not an investment. How many people would buy a house if they thought it was going to lose 40 to 100% of its value in 5 years and then pay another 25 years on a mortgage and hope that the value at least comes back to neutral. Especially people that will reach retirement age in that timeframe. Very short sighted and unempathetic.
Once again main street gets the high hard one. either these people are bankers or imbeciles or both!!!!!

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Jamaal December 16, 2011 at 8:26 am

My wife and I are considering strategic default… we’ve lost about 60K on our home in just four years, and see this as an opportunity to get ourselves on solid financial ground with regard to credit cards, student loans and such. And we’ve definitely dealt with the moral side, being that we’re Christian. We came to a couple conclusions:

1) We’re not breaking a contract. We’re enacting a portion of our mortgage that says the bank can have our house if we don’t pay the monthly bill. We are losing the house… it’s collateral. It’s all wrapped up in the deal, and the bank signed the deal too.

2) We believe that God asks us to be good stewards of our money, and that throwing hundreds of dollars per month into a black hole is throwing money away that could go to getting us in a position of financial freedom, and lead us to being able to be more generous with our time and money.

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Dave December 16, 2011 at 2:55 pm

“We believe that God asks us to be good stewards of our money, and that throwing hundreds of dollars per month into a black hole”….

Uh, hold it right there….

Do you really think the banks and shareholders of said financial firms that service these loans consider THEIR holdings to be a “black hole”? If it IS a “black hole”, it’s clearly not YOUR black hole to decide if it warrants feeding or not.

You only need ask the question, what would happen if EVERYONE defaulted on their loans? Pretty clear: we’d have what we had in 2007, with massive Fed-funded bailouts, TARP, etc. That was taxpayer-funded, which means we ALL paid for the misdeeds of the few.

I understand that you will do as you will, and even use the “stewardship” nonsense to rationalize your actions, but at least be honest enough to admit that what you’re doing is ethically (if not morally) bankrupt….

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RoboBobo December 19, 2011 at 1:40 pm

You can borrow money to purchase a house, by borrowing against your 401k plan.

Strategically defaulting on a loan – that you took from yourself, is neither illegal nor ethically shady.

It happens. I recommend each person make the decision that’s best for their own family based on the rules. That’s not the same as basing your morals on the law. But its being cognizant that laws are the shared understanding we all have – of what the terms and responsibilities we have to a contract.

In my mind – your typical bank understands the rules and uses them ruthlessly. I recommend individuals do the same – with a bank.

However, if you borrowed money from your relatives, they don’t know about any of that, and I recommend, you work within tighter confines – of common sense.

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Patricia February 13, 2012 at 9:33 pm

I’m considering a strategic default on a home I bought with my husband when we relocated to the Midwest in 2006. We bought new construction with a one year Builder’s Warranty. One month after closing we started having problems – none of which the builder remedied. Six months later we were having even bigger problems with our home – structural problems. Again, the builder failed to remedy any of our problems despite the contract he made with us at the time of purchase. Conveniently, he fled to a neighboring state, set up shop there under a new name, and began building new homes in his new community. His first bankruptcy for his Nebraska corporation was discharged except our debt. So we continued to pursue him. He filed personal bankruptcy in Missouri. Back and forth, back and forth, Statement of Presumed Abuse, delays, delays, and more delays and finally, his Missouri bankruptcy was discharged. Out the window went all of our hopes of recovering anything from him. By the way, at this point we’d hired a Structural Engineer and Geotechnical Engineer to tell us what’s wrong with our house and how much it’s going to cost to fix it. Our $200,000 “investment” (again purchased in 2006) where we were going to start our family is now valued at $60,000 and needs upwards of $160,000 in repairs to make it right. At some point our house will become unsafe to live in according to the City Building and Safety Division. I’m literally throwing money away on a home that was never worth what we paid for it since the problems started right away. At this rate, it will take me roughly 190 years to recover the “equity” I made in the so called “greatest investment of my life.” We can’t even sue the sub-contractors because, as a matter of law in this State, they owe us no duty absent a contract. Their “craftsmanship” was negligent but they walked away from it. Everyone that had a hand in building this house has walked away from their responsibility and I’m the one who is morally and ethically bankrupt for considering a strategic financial maneuever? Give me a break. The whole new home construction, real estate, and mortgage industry is morally and ethically bankrupt.

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Joe Plemon February 14, 2012 at 10:12 am

Patricia,
Wow. What a nightmare! Certainly your dilemma presses the envelope as to exactly where ethics and morality start and stop. Considering the complexity of your situation, I would expect that you and your husband need to do what is right for your family and your future. This is why personal finance is considered personal finance: one size doesn’t always fit all.

Something to think about: One of the points I made in this post was that “the lender will come after you”, but I was corrected in the first comment of the thread: lenders in non-recourse states cannot pursue judgments beyond what the foreclosure sale brings. If you happen to live in a non-recourse state, then your lender made the loan while fully understanding the consequences of what a foreclosure would mean. I would think banks would be factoring this scenario into the structure of the loan (higher interest rates or greater PMI requirements?) , meaning the borrower would be footing some of the risk to the lender.

Therefore, if you decide to strategically default, you are in a much better position to do so if you live in a non-recourse state. If you don’t happen to live in such a state, your lender could and probably would continue to pursue you for underwater portion of the loan.

You are in a situation where there seem to be no good solutions, so (as I previously mentioned) you and your husband need to make a tough decision that you can live with, both now and later. I wish you the best as you deal with this nightmare.

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