What is Strategic Default?

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What is Strategic Default?

From Wikipedia,

"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.

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 has negative equity or is "underwater" — and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble."

Strategic Default is also known as "Bail Out" or "Walk Away".

Why do borrowers choose to Strategic Default?

  1. They feel their housing values are under water. 
  2. Will never be able to build equity.
  3. They can buy another house down the street for less money.

Is it illegal for a borrower to Strategically Default? No, but there is a moral duty to make payments on debt if one is able.

Does the bank have recourse? Different countries and different states in the United States treat default on mortgage debt differently, notably distinguishing whether it is recourse debt and non-recourse debt, meaning whether the mortgage lender can pursue claims against the defaulted debtor.


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Susan Jacobs

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