When would a Strategic Default make "good" sense?
When I was a young grad student, one of my professors said; " . . . there is always a simple answer to a complex question . . . and it's usually wrong."
I feel the issue of Strategic Defaults certainly falls into this category.
I have read several posts on this topic and a lot of people seem to have a personal opinion about the "morality" of this choice.
As professionals, we owe it to our ourselves AND our respective industries to provide logical, well thought out responses to such complex issues as Strategic Defaults without making people feel any worse than they already do, thanks to their predicament. It is our job to provide as much information as we possibly can so that people may make INFORMED DECISIONS rather than emotional ones . . . And most certainly, let's not be too hasty to cast judgment unless we have walked in someone else's shoes.
First, let's be clear about what is a "Strategic Default" . . . and I quote Debe Maxwells' great blog:
"A strategic default is the decision by a borrower to stop making payments (default) on a debt despite having the financial ability to make the payments due.
This is associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the property value is such that the debt owed is (considerably) greater than the value of the property – the property negative equity or “upside-down” – and the value is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are also called “walkaways.”
Now let's address the question of . . .
"Should you engage in a strategic default?"
My PERSONAL OPINION
First, my personal opinion about Strategic Defaults is that I completely concur that one should NOT renege on any commitment (contractual or personal) if you have agreed to a particular course of action. Simply choosing NOT to make your mortgage payments, even though you can, and allowing your home to go into foreclosure hurts us all.
However, I have come across one scenario whereby a Strategic Default seems to make "logical" sense, and that is:
1. A homeowner is too far underwater to break even on a property sale in the next several years
2. They have to relocate due to employment reasons (and many are faced with this choice right now)
QUESTION: What would you do in this instance?
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