Strategic defaulters more likely to be financially educated

Walking Away

The people who strategically default may be doing so because of their financial savvy. Photo Credit: Kelseyman749/

People who engage in “strategic default,” purposely defaulting on a mortgage when it’s no longer worth the effort, may be more financially astute than other homeowners in default. A recent study indicates that strategic defaulters have higher credit scores than people who stick out a bad mortgage. However, there are not many people who engage in the practice.

Higher credit scores among those who default on purpose

A recent study by Fair Isaac And Company (FICO) found that homeowners who engage in a practice called “strategic default” usually have higher credit scores than normal defaulters, according to USA Today. FICO found that people who strategically defaulted on their mortgages usually had most other aspects of their personal finances in order and took steps to protect themselves. For instance, only 10 percent of strategic defaulters had maxed out their credit cards and usually would open card accounts with new companies before defaulting. That way, they didn’t have to worry about having to get bad credit loans when a default showed up on their credit report.

Many disapprove of the practice

Not everyone approves of the practice of strategic default. A survey by legal website FindLaw, according to NASDAQ, found that six of 10 people surveyed did not approve of strategic default. However, 34 percent of respondents said that default was acceptable if the mortgage was underwater. People 65 and older were more accepting than those aged 35 to 44, who were the least accepting of strategic default. Strategic default makes sense from a business perspective. Homes are assets, and it doesn’t make sense to pay more for an asset than it is worth on the market. However, people often feel a moral obligation to meet commitments such as making payments on a mortgage, car or personal loans of any sort.

Foreclosures slowing

The rate of foreclosure slowed during the first few months of 2011, according to CNN. RealtyTrac announced that in the first quarter of this year, it observed 681,000 filings, which includes foreclosure filings, evictions and realty auction notices. RealtyTrac also observed 215,046 homes that had to be vacated by the residents. A filing doesn’t mean a family has been kicked out, only that a notice has been filed. Both figures were reduced from last year. Overall filings fell 27 percent from 2010, and evictions fell by 17 percent. Strategic default has increased during the recession, but is only estimated to have made up 35 percent of all foreclosures overall.


USA Today



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