Strategic Default

As its name implies, a strategic default is made as a financial strategy and not inadvertently. Strategic defaults are commonly undertaken by residential and commercial mortgage holders who have analyzed the costs and benefits of defaulting rather than continuing to make payments and who find defaults more beneficial. The term strategic default generally implies the decision of a debtor to stop complying with the corresponding payments, that is, by default on a certain debt, despite having the financial capacity to make the payments thereof.

A different situation is that of a homeowner who is struggling financially and cannot afford to continue making current mortgage payments. With a strategic default, the borrower does the math and makes a business decision to voluntarily stop making payments, even if it is within the borrower’s ability to keep up with the payments. This type of default is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial fall in the price of the house in such a way that the debt is greater than the value of the property.

Strategic defaults are often used by borrowers when the value of their property has dropped substantially in a fairly short time. If the value of the property falls below the mortgage balance then a strategic default provides a way to minimize the loss to its owner. Homeowners who use this strategy have been dubbed “walkaways.”