A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? Youll lose your home and your good credit history will be badly damaged.
If you dig a little deeper, the logic becomes apparent.
Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for 0,000 and he took out a 0,000 mortgage which is costing 00 per month to service. He has a nice job and has no problem paying 00 per month.
However, he knows that half a dozen identical 3 bed condos in his community, which werent sold in 2006 have recently been purchased by cash buyers for ,900 each and theyre renting out for 00 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves 00 per month.
It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays 00 per month to his landlord. He wont get a mortgage or a car loan for 3-7 years, but he doesnt particularly care as hes done nothing illegal, hes free of that huge 20 year debt and he doesnt mind renting for a while.
The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.
In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and wont think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.