One of the most difficult questions I am often asked is whether an individual should default on their loan. Strategic default is the decision by a borrower to cease making mortgage payments despite having financial ability to do so. This phenomena can be used as an affirmative negotiating tool to unload properties with no equity or for individuals seeking to modify a loan or qualify for a short sale. According to recent studies Experian (of the National Credit Bureau) a good portion of all defaulted loans today are strategic defaults made by choice rather than out of necessity. In short, Strategic defaults have become an elective business decision.

Some argue that strategic defaults are morally wrong. After all, if people sign an agreement and made a commitment to repay the loan many argue they have both a moral as well as ethical obligation to honor that commitment. The counter argument is that mortgages are not ethical documents but rather are legal contracts.

The borrower agreed to two options, pay on time and keep the property or stop making payments and run the risk of losing the property and tarnishing their credit. Meanwhile, the lender had the property appraised and agreed the loan would be secured by the property. Both parties were aware of the risks going in. Perhaps a stronger argument can be set forth that a mortgage is simply a legal contract and perhaps it was the greed of mortgage lenders to abandon traditional underwriting standards that put borrowers in this position today.

Ironically, practice has taught me many borrowers are forced to stop making payments by circumstance. Unfortunately, the prevailing mentality of most banks is that they will reject a short sale offer, despite how reasonable it may be if loan payments are current. As long as the loan is not in default and it is a performing loan…they readily admit they have no incentive accept the short sale. Additionally, it is the exception rather than the rule that banks will modify a loan that is current. At the end of the day for most, to default on mortgage payments is viewed as strictly a business decision.

In fact, in certain cases it may be argued that it may be morally reprehensible to keep a ship afloat by throwing good money after bad, depleting all savings, tapping into retirement plans and ultimately credit cards until the individual is completely broke and ends up ultimately losing everything. Perhaps it is better to default now rather than in two years and be unable to support your spouse and children. You can always recover your credit…but unfortunately not your cash. By opting out now there may be funds still available to negotiate a settlement with your lender.

One word of caution. Many times when strategically defaulting to obtain a lenders attention individuals unexpectedly wind up grabbing the attention of other loan sources which are current. For instance, in an attempt to obtain the mortgage lenders attention one borrower I know skipped two mortgage payments despite their clear ability to do so. Unfortunately, they had the credit line on all three of their credit cards dramatically reduced as well as witnessed their credit score drop before the mortgage lender ultimately agreed to a modification.

At the end of the day to default or not to default…..remains a question only the borrower can answer for themselves.