Strategic Default: Immoral or Intelligent?

Strategic Default

As Utah home prices continue to decline, the topic of strategic default is becoming more common. Strategic default is simply the decision to stop making your monthly mortgage payment even though you may be financially able to do so. Over the years, I have shied away from working with Utah homeowners who choose to strategically default on their mortgage. Like many others, I thought of it as irresponsible or unethical. It just didn’t seem right. That said, my eyes have recently been opened to a new perspective.

As I was researching the topic of strategic default, I stumbled upon a paper written by Brent White, a University of Arizona law professor. White argues that breaching a mortgage contract is not only morally acceptable, it may be the most responsible course of action when necessary to fulfill more important obligations to one’s family. This is a concept that is foreign to most of us. We have a natural tendency to look down upon those people who would “choose” to let their homes go. We think of them as irresponsible and selfish, that they are only looking out for themselves and care nothing for the neighborhood or their personal obligations. Although this is currently the socially acceptable reaction, White does a great job of helping you see the other side of the story.

Among other arguments, White compares a mortgage contract to any other contract. To illustrate his point, he uses the example of a cell phone contract. He writes,

“First, a mortgage contract, like all other contracts, is purely a legal document, not a sacred promise.

Think of it this way: when you got your cell phone, you likely signed a contract with your carrier in which you “promised” to pay a set month payment for two years. Let’s say, though, that two months after you sign your contract, the price of cell phone service drops by half – meaning that the same cell phone service you pay $100 a month for could be had for half of that with another carrier. You decide that you would be financially better off paying the early termination fee of $300, rather $100 a month for another 22 months for the same service that you can now get for $50.

Would it be immoral for you to break your contractual “promise” to pay $100 for two years, and elect instead to pay the early termination fee? Of course not. The option to breach your “promise” to pay is part of the contract, as is the consequence of breach – a $300 early termination fee. There is absolutely nothing immoral about exercising your option to breach, and you’d be financially wise to do so.”

White also tackles the argument that mortgage default hurts neighborhoods and the economy. White points out that underwater homeowners carry an unequal portion of the burden to prop up neighborhood values while lenders are slow to come to the negotiating table and work out better options. He writes,

“If lenders were less intransigent and more willing to negotiate, underwater homeowners wouldn’t have to walk away from their homes in order to save themselves from financial ruin. And we wouldn’t have to worry about the fragile housing market crashing again.

Why speak of morality and social responsibility only when talking about strategic default by homeowners, and not by financial institutions or large corporations?” 

He goes on to highlight two major U.S. businesses who chose to strategically default on their mortgage obligations yet they were not criticized for being immoral.

Although I still find myself struggling to overcome the ingrained social stigma of strategic default, White has helped me to look at this topic from a different perspective and to be more understanding of Utah homeowners who choose strategic default when dealing with their underwater home.  If you have any questions at all regarding your home, please contact the Frei Team to help you out!

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