The Washington Post has an interesting — and not very surprising — article on Strategic Defaulters. It is based on a study by researchers from the European University Institute, Northwestern University and the University of Chicago.

The key data point:

“[Estimates are] that 35% of defaults in September may have been strategic, up from 26% in March 2009. But they acknowledge in a report published last month that the numbers are tough to tease out because “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to the report…”

In other words, they really do not have much of a clue as to what the actual numbers are.

What we do know is that whenever mortgage borrowers are more than 25% upside down — when the home is worth only 75% of the mortgage amount owed — strategic defaults and walkaways go up dramatically in numbers:

“This relatively new type of behavior is the latest sign of just how profoundly the mortgage crisis has reshaped consumer attitudes toward their homes and their finances. It is largely driven by plunging home values, which have left nearly a quarter of the nation’s homeowners underwater, or owing more on their mortgages than their homes are worth.

So some do the math and walk.”

By “relatively new type of behavior,” I assume they mean years and not decades old.

One thing that is peculiar: I do not get the impression that the authors of the study really understand what the word STRATEGIC means:

“A growing body of research shows that these so-called “strategic defaulters” defy the tell-tale characteristics of most people whose loans go bad. They pay their bills on time, rarely exceed their credit-card limits and hardly use retail credit cards, according to a study released Thursday.

And they plan ahead.

They know their credit scores will take a hit after they fall behind on their mortgages, so they tend to open new credit cards in advance of defaulting, according to Thursday’s study, conducted by FICO, the firm that created the nation’s most widely used credit scoring system.

“These are savvy people who organize themselves,” said Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.”

In other words, these strategic defaults are (duh) done strategically and are not due to insufficient monies. (Those might be called “financial defaults”).

Geez, academics can be pretty clueless sometimes . . .


Wealthy: Most Likely to Walk Away from Underwater RE (July 9th, 2010)

Mortgage Bankers Association “Walks Away” from HQ (February 7th, 2010)

Strategic Defaults in Florida (October 28th, 2009)

Strategic defaulters’ pay bills on time and plan ahead, study finds
Dina ElBoghdady
Washington Post, April 21, 9:22 PM

See Also:
Builders of New Homes Seeing No Sign of Recovery (NYT)

Category: Credit, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

26 Responses to “A Closer Look at Strategic Defaulters”

  1. contrabandista13 says:


  2. Blurtman says:

    There is no shortage of RE developers who have strategically defaulted, and yet they seem to be able to continue to obtain financing for future projects. Why should consumers who strategically default suffer a dinged credit rating at all, if they can afford a future loan?

  3. louis says:

    Playing the part of Michael Corleone will be – The Homeower

    Sollozzo will be played by – Mers, Chase, Servicer, Linda Green, GS, Fannie, were not really sure.

  4. Robespierre says:

    Some of the same here:

    Interestingly higher FICOs are also predictive. Important since it takes about 7 years to recover the score so it is safe to assume that these people will be out of the housing market for a while.

  5. Sechel says:

    Not to be confused with defending the strategic defaulters, but does anyone not see the double standard
    versus real estate developers on their loans. It’s not unheard for them to walk away or use the
    strategic default as leverage for negotiating an extension or other new terms.

  6. mhdoc says:

    As to clueless academics…

    I was working with a guy to build a carport. We get all the parts laid out and he can tell I am not sure what to do next. So he says “You don’t know 3, 4, 5 do you?” He then shows me how you tie knots in a string at three, four, and five foot intervals and presto, square corners.

    I am left standing there thinking this guy has never heard of Pythagoras, and has no idea of how to solve A squared + B squared = C squared, but he can build a square corner. A humbling moment :)

  7. mort_fin says:

    the whole definitional thing is a little bogus, and the definition pretty much forces “strategic defaulter’ to be correlated with “high FICO.” They define strategic defaulters as people who pay their other bills, but not their mortgage. The first thing to note is that this is not a definition of capacity to pay, and is only “Strategic” in the sense that they’ve thought about the adage ‘you can sleep in your car but you can’t drive your house.” Someone who makes $2000 per month, net (maybe they made $3,000 when they bought the house but got laid off and are now working for less) and has a $1000 mortgage payment, a $500 car payment, and puts $700 in groceries on the credit card does the math, sees they can’t do all 3, and decides that car and groceries take precedence over mortgage. This person is a “strategic defaulter” under the definitions used in these studies. And they had a high FICO before they went delinquent on the mortgage (they paid their bills). But I don’t think this is what the typical person has in mind when they hear the term “strategic defaulter.” I think they are thinking of the case of the person who makes $3,000 a month instead of $2000 and could pay al their bills, but decides to skip the mortgage payment because they are underwater.

    And because the authors DEFINE a strategic defaulter as someone who pays everything but the mortgage, it’s impossible for a low FICO borrower to fit their definition, even if that borrower has enough income to pay everything, skips car and credit card payments occasionally only because they are scattered and disorganized, and is not paying the mortgage because they don’t want to throw payments at an underwater property.

  8. Sechel says:

    FICO is a misused stat. It speaks to Credit and not capacity to pay.

  9. wally says:

    “relatively new type of behavior,”

    New for homeowners, perhaps, but old hat for developers, commercial investors… and bankers.

  10. beaufou says:

    Strategic default is a logical end to the whole mortgage mess.
    As Banks have been consistently reluctant to modify loans, even though they had incentives to so; people are wising up , saving their money and rather than throw their last dollars at the bank, hire a lawyer to defend their case.
    Personally I think it is the right thing to do, the society we now live in encourages this kind of behavior, bankers and FED policies first.
    Ruining your credit score is way better than ruining your life and living in your car.

  11. speaking of ‘Strategic Default’..

    Jingle Mail: Morgan Stanley Failed to Make $3.3 Billion Debt Payment by Friday Deadline, Handed Over Keys to Central Tokyo Office Building to Blackstone; Largest Ever Repayment Failure of Its Kind in Japan
    April 17th, 2011

    Via: Reuters:

    A Morgan Stanley property fund failed to make $3.3 billion in debt payments by a deadline on Friday, handing over the keys to a central Tokyo office building to Blackstone (BX.N) and other investors, the largest repayment failure of its kind in Japan.

    It marks the latest fallout from a series of highly leveraged investments by Morgan Stanley (MS.N), one of the most aggressive investors in worldwide property markets before the global financial crisis.

    The $4.2 billion MSREF V real estate fund missed its April 15 deadline to repay 278 billion yen($3.3 billion) worth of debt packaged in commercial mortgage-backed securities on the 32-storey Shinagawa Grand Central Tower, a property which has seen its value plunge, two people involved in the transaction said.

    They spoke on condition of anonymity due to the sensitive nature of the matter.

    A Morgan Stanley spokeswoman in Tokyo declined to comment. A New York based spokesman for Blackstone, which holds the most junior portion of the debt and gains the right to market the building for seven months, was not immediately available for comment….”

    defining that Term — Strategic Default — as the Study, in the Post, does, is, merely, meant to cow the ignorant..

    as others, above, begin to point out.. (def. #2) (#3)

  12. Christopher says:

    Beat me to it Mark….

    One would think the largest RE default in history would make the news somewhere….
    Funny how that works….

  13. Bill Wilson says:

    No one who signs a mortgage puts their hand on a Holy Bible and swears to anything. Strategic Defaulters are using common sense.

    If we had a system where bankers were expected to eat the losses that are caused by their own bad decisions, the fear of strategic default would help keep bankers in check. Another reminder that their job is to evaluate risk.

    Unfortunately, it will be the U.S. taxpayer and holders of dollar denominated assets who will pay the price for the poor decisions of borrowers and lenders.

  14. Lyle says:

    Mark’s Comment just reinforces the point that society has one standard for business conduct and another for ordinary people. My thought is that people have discovered the double standard and have decided that if its good enough for Morgan Stanley its good enough for them. Of course the building was held by a distinct investment trust, so it did not directly hit Morgan Stanleys credit rating, but then the same was true of the Bear Hedge funds.
    In any case was is sauce for the goose is sauce for the gander as well. Of course part of the issue is the modern version of the Jeffersonian yeoman farmer idea. While people can’t farm the idea of home ownership is the same concept. Plus the old religious concept that a promise means something. In the case of a mortgage the result of not paying is spelled out, so both sides should know the results (perhaps the fees involved in foreclosure should be in the loan documents).

  15. Transor Z says:

    Losses from the sale of personal-use property, such as your home or car, are not deductible.

    . . .

    If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040 Schedule D, Capital Gains and Losses. If your net capital loss is more than this limit, you can carry the loss forward to later years. [But not for your home, suckas.]

  16. Bruman says:

    “Geez, academics can be pretty clueless sometimes . . .”

    Uh… as a former academic, I like to jump to the defense of academics, who – though they do miss things – are often blamed for stuff that isn’t their fault, and is quite often the result of a student of theirs learning only part of what was taught and then misapplying it (or, more often, leveraging up to optimize risk-return ratios, and then forgetting that when your leveraged is maxed, there is zero room for error, and that all the assumptions required for most financial formulas pretty much guarantee that you are going to have some error).


    What part of that quote came from an academic? It’s the JOURNALIST that doesn’t get what is “strategic” about a strategic default. “The research” is very likely just trying to define a strategic defaulter, not marvel at why it might be called strategic.

  17. barbacoa666 says:

    I have kicked the tires on about 50 REOs. the vast majority suffered from years of deferred maintenance, and were basically uninhabitable by the time the occupants left. So, I’m going to bet that most of these strategic defaulters could never afford the upkeep on their homes. They walk away not so much because they are under water, but rather, they can’t afford the $20-$30,000 of repairs necessary to maintain habitability.

  18. sue806 says:

    Why shouldn’t they default, Wall Street changed the standard capitalist policy and procedure of “Dont pay, be foreclosed on” to modifying negative equity homeowners to avoid the investors financial loss from the difference between the distressed sales price of a foreclosed negative equity property and the outstanding mortgage amount for 3.5 million negative equity homeowners.

    When a policy or procedure is changed it applies to all similarly situated individuals, there is no picking and choosing. To stop the violations occuring, join the petition demanding that every negative equity homeowner receives a consistent and similar financial incentive, benefit, advantage to remain a negative equity homeowner as the PRECEDENT that was set dictates.

  19. Professor Tim 1754 says:

    There is a glaring omission in the original post. Strategic v. stragetically is just a red herring. The *real* issue is that not all states treat the defaulter the same! In some states, the defaulter can walk away without worrying whether the bank will come after them, but, in others, the defaulter is taking a lot more risk because the bank has the legal rights to come after them for the unpaid balance.

  20. Jim67545 says:

    Before we endorse strategic defaults, consider who is paying for the losses the owners of the note (usually not the lender) experience as they foreclose upon and sell these properties. Next time you wonder why your interest bearing checking account earns 0.00001%, your ATM fee is $3, etc. think. When the tab for the government buying the mortgage flow comes due, think. When mortgage rates rise because that guarantee is withdrawn, think. When you try to sell your home and can’t (at a reasonable price) because of the foreclosures for sale in your neighborhood, mortgage rates and more limited credit availability, think. When your local government increases property taxes because values have dropped, think.

    I don’t believe that having hundreds of thousands of contracts of this type violated can possibly be good for anyone but the strategic defaulter (maybe.) I submit that we all pay a price because of this. I, for one, am not happy about that.


    BR: Are you arguing that interest rates are low due to strategic defaulters? That’s rather novel.

  21. beaufou says:

    “consider who is paying for the losses the owners of the note (usually not the lender) experience as they foreclose upon and sell these properties. ”

    Actually, investors who own the loans have been pushing for modifications but our good old banking friends servicing the loans are refusing to do so.
    They are the same people charging you $3 for ATM transactions and offering 0.00001% while making record profits, having been bailed out and distributing huge bonuses to themselves.
    And this is the kind of scum we are supposed to think about?

  22. AG Sage says:

    I wish people would “do the math” BEFORE buying. Sheesh. NOW they are financially savvy . . . a little late, isn’t it?

  23. dsgov says:

    This is the first time I am making a comment here so please indulge my ignorance but I’d like to ask a question/ add something to the previous post.
    I have been reading this blog (via Google reader for quite some time) and have not seen much chatter about the following paradigm.
    The well known big banks (citi, wells fargo, boa, jpm, gmac etc) are far and away the largest servicers of residential mortgages in the US, ironically the biggest owners of second mortgages in the US are these same banks (to the tune of around 750billion dollars).
    Recent experience of Chrysler bondholders notwithstanding , I’m pretty sure if a debt servicer grants principal forbearance or forgiveness via loan modification on the senior debt that should render the subordinate debt the banks own essentially worthless or at least significantly impaired. Makes it crystal clear why there are no prin mods to date , what bank will write down their portfolio holding by hundreds of billions of dollars, for that matter who has that kind of loss reserves let alone tangible equity ? As I read through recent press releases regarding servicer settlements with government institutions on the state and federal level there is absolutely no mention of this disturbing conflict anywhere .Not to mention the fact that all these settlements are focused on the consumer side of the servicer activity, what about the bondholders to whom the servicers distribute the monies they collect from homeowners whose loans where sold to trusts? the liability there is immense..generally scary stuff

  24. beaufou says:

    AG, you mean Morgan Stanley?

  25. Jim67545 says:

    BR: You misunderstand. Larger numbers of defaults will delay the day when a true secondary market in mortgages will be reestablished. In the meantime, I fear that the government absorbing the mortgage flow will end and the discredited MBS will need to command substantially HIGHER rates to attract buyers and to offset the buyers’ anticipated losses. MBS buyers view the investment as high risk and from what I can see, they are being sold either on special circumstances (specially constructed pool of jumbos), at a large discount or with the full faith and credit of us all. In any lending situation higher risk translates to higher rates and strategic defaults lead to higher risk of loss therefore HIGHER mortgage rates.

  26. druce says:

    Is it a strategic default if you decide not to raise the debt ceiling in order to shut down the government?