One of the major distinguishing factors between a strategic default and any other default on a mortgage is that a strategic default is a deliberate business decision. The homeowner has the ability to make mortgage payments but simply decides not to – usually because the value of the property is less than the money still owed on the property. Traditionally, lenders have used the degree of home value depreciation to try to predict strategic defaults, but FICO Labs, an analytics and decision management technology provider associated with FICO, has released new software and analysis strategies that can “identify borrowers who are over 100 times more likely to default strategically than others”[1].
Researchers have found that home value and principal amount do play a role in strategic defaults, but that there are some other distinct character traits that identify likely candidates to make this decision. Strategic defaulters tend to have “higher FICO scores, lower revolving valances, fewer instances of exceeding the limits on credit cards and lower retail credit card usage.” In fact, their behaviors are nearly polar opposite of those of distressed defaulters. Strategic defaulters default “because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” says FICO Labs head and FICO chief analytics officers Andrew Jennings. Furthermore, they plan ahead for the hit they will take when they default, he adds, opening new credit cards and arranging for housing before they “do the math and walk”[2].
The team of researchers from the European University Institute, Northwestern University and the University of Chicago believes that 35 percent of defaults in September of 2010 may have been strategic. However, these numbers are difficult to pin down because strategic defaulters have “the incentive to disguise themselves as people who cannot afford to pay” in order to avoid aggressive recouping action on the part of lenders. Another study by Morgan Stanley also notes that despite the careful planning aspect of a strategic default, the decision is also largely influenced by emotion. People with new, large balances on their mortgages are more likely to default, but people who believe that doing so is immoral are less likely to. Anger at a financial institution or situation makes a strategic default far more likely, as does acquaintance with another borrower who strategically defaulted with apparent “success.”
Many people find it very easy to empathize with strategic defaulters because they themselves are so frustrated by the existing housing situation. Do you think a strategic default can be justified? Do you know anyone who has benefitted from doing it?
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[1] http://nationalmortgageprofessional.com/news24767/new-fico-technology-seeks-pinpoint-strategic-defaults
[2] http://www.washingtonpost.com/business/economy/strategic-defaulters-pay-bills-on-time-and-plan-ahead-study-finds/2011/04/21/AFcGQSLE_story.html
If you take the emotion out of the equation, then you have to ask yourself, if the house next door to mine just sold for $300k, why am I going to keep paying on my $550k loan? It will take a serious market recovery to make up that difference. If the homeowner was planning to stay in the property 5 years or less, then the decision becomes much easier. On a side note, when people use to buy a house to live in, they looked at long term factors, schools, access to shops, etc. They were thinking long term, not how much money my house is worth at this particular moment. The difference that that caused, is you were less likely to have strategic defaults. Once people started using their houses as ATM’S, then that strategy went out the door, and the new way of thinking took over, which is where we are now, people making “Business” decisions regarding their personal finances.
How much sense does it make to keep paying on a mortgage where the property is worth less than the mortgage balance? The largest lenders in the U.S. caused the so called meltdown by committing massive fraud on the American people thereby creating the ripple effect of countrywide unemployment and are now fraudulently foreclosing with manufactured documents alleging to own the properties after having purchased credit default swaps to benefit even more. Most of the securitized mortgages which is about 90 percent of all the mortgages are being paid to servicers who have NO legal right to even collect. Every homeowner of these mortgages should default and sue the lender, servicer and foreclosure mill firms!
Simply put; don’t business and banks do the same thing? All the time? Case in point the bank bailout. Did not many of the banks that got bailed out still not “lend”? Rather they sat on the money? Of those banks that did lend; it was and still is at next to impossiable rates and terms. Seems the banks see it as just a simple case of throwing “good money after bad”. Seems that when an “worker bee” does it. Its called “strategic default”. But when big business does it, its called “damage control” or “loose mitigation”. I believe that everyone should handle there personal finances as though they are running a business; YOU INC and take the same attitude of big business. If its necessary to “cut” losses at the expense of someone else; namely a lender or big business. Well then so be it! Cause big business decides and behaves the SAME way toward YOU INC.