Understanding Strategic Default

It’s important to first understand what exactly we’re talking about. Strategic default occurs when you have a mortgage and are unwilling but able to make the payments. This differs from involuntary default, where you can’t make payments on the home loan.

Strategic default most often occurs when a homeowner is “under water” on their home loan. What this means is that they owe more on their home loan than what their house is worth. They stop making mortgage payments, move out of the home, and the home eventually goes to the mortgage company. The homeowner then eliminates that negative equity. Of course, they no longer own a home, either.

What’s Good for the Goose

One of the most interesting phenomenons regarding strategic default is that it’s a regular practice for corporations to stop paying on a mortgage when they owe more than what a property is worth. Yet there seems to be a different standard when it comes to individual homeowners. A homeowner isn’t a big business – he’s expected to honor his debts and fulfill obligations.

Are You Breaking a Contract?

Critics of strategic default would argue that by stopping payments when your home loan is under water, you are violating or breaking your home loan contract. However, this isn’t the only way to look at it. Your mortgage agreement specifies what happens if you don’t make payments. The home belongs to the mortgage company. It’s not as if you’re trying to continue occupying the home after the bank forecloses. You’re not standing in the way of their property.

Someone Has to Pay

The other side of the argument, of course, is that there’s a loss involved. That loss should be yours – you’re the one that bought the house, lived in it, and assumed it was worth as much as you paid for it. If the home’s value has fallen, you should bear the brunt of it, not the mortgage company.

Still, here again it’s not black and white. Like many others, your home may have lost value due to market forces and to the housing collapse. The collapse which is, arguably, more the fault of mortgage companies than you.

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