Strategic mortgage default is in the real estate news these days. Since many homes have lost a lot of market value since they were purchased and the amount owed on the property is much more than the home would currently sell for, some people are deliberately letting the home go into foreclosure so the homeowner can get out of the debt.

Recently on TV a couple was featured who are in the process of making a strategic default. They bought a small house near Phoenix in 2006 when prices there were at their highest. They purchased the property for about $400k, but now it would only fetch approximately $90,000 if sold today. They have the means to pay their current mortgage, but they have chosen to stop payments and let the house be foreclosed upon so they can get out from under over $300,000 in debt,

So this begs the question about the morality of sticking someone else with one’s mortgage debt. To be honest this practice does feel a bit slimy. If their bank gets stuck and has to eat most of the loan amount and take the loss, the costs will eventually be borne by others in the community through higher prices and more difficult loan terms for other people. On top of that, the borrowers are adults. They signed a valid contract, so why shouldn’t they pay their debts, especially if they have the money?

Then again one might ask how bad do banks feel when they foreclose on a homeowner? The big Wall St. banks created dubious financial instruments with mortgages, and they approved loans for buyers who were not the least bit qualified. They did this to make quick paper profits and give themselves huge bonuses.

Did the people who caused the financial meltdown while they were giving themselves huge bonuses get punished? After all, their actions led to a severe recession, the worst since the great depression, and million of people lost their jobs and their homes. No, they were not. In fact the U.S. government bailed them out with hundreds of billions in taxpayer money.

Thus, if a person who is carrying a mortgage that is significantly higher than the value of the property decides to let the home go into foreclosure, that is simply a personal financial decision, in the opinion of this author. The homeowner has repercussions to deal with like a poor credit rating, but the banks took the responsibility to make the loan under certain conditions, and if they did not make provisions for this type of eventuality, that is their fault and their responsibility.

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