“Strategic Default” – How big this problem is?

First of all what is a Strategic Default? Defaulting in repayment of mortgage loan installments is widely occurring in the US, basically for financial reasons of inability. Millions of home owners find themselves in this precarious position, for assorted reasons such as – job loss; ballooning effect of repayment installments going beyond their monthly budget; cost of living exceeding household income; other financial commitments; death, divorce or such other occurrence in the family, leading to pressing financial inability etc. But if defaulting in repayment is done wantonly as a strategy, it is known as Strategic Default.

People indulging in this kind of default may be paying all their other commitments like auto loan, credit card debt and so on, excepting the mortgage loan. Financial experts and real estate analysts are of the opinion that mostly people, who find their property value drops down below what they owe on their mortgage loan, select Strategic Default. They get frustrated that there is no use paying the mortgage installments, as there is no hope of retaining their home anyway.

Various researches and studies have been conducted on the number of people and attitude behind Strategic Defaults. Here are some of the results to show the enormity of the problem:

Morgan Stanley conducted a research using data available from TransUnion; and their latest report says – a) the payment habits of 6.5 million US borrowers were examined with first-lien mortgages originating in 2004 or later; b) it is estimated that 12% of all mortgages in the month of February 2010 were strategic; c) typically such borrower who is underwater in mortgage obligations stops paying on the concerned home loan; d) yet such borrower meets other “meaningful” non-mortgage obligations and e) the incidence of strategic default is higher among those with higher credit scores and larger loan balances.

There are other reports of research and analysis conducted by various organizations on Strategic Default, which we will see later. First the Morgan Stanley research report tells us an important point – such of those home owners in the higher scale financially, often indulge in strategic default – because they do not worry about their credit scores getting ruined by foreclosure, and they can just walk away from their home.

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