Is Strategic Default Unethical?

Do you feel guilty about considering a strategic default?

Does it make you a bad person? An unethical person?

Absolutely not.

Voluntarily defaulting on a mortgage is not immoral or unethical. Ethics should not enter into your decision concerning whether or not to strategically default. Law Professor Brent White of the University of Arizona puts it simply in his academic paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis:” Morality and emotions have no place in one’s decision to strategically default on a mortgage.

Forget about shame and guilt, Prof. White says. Don’t worry about your credit score. If you owe more than your home is worth, stop paying your mortgage and walk away.

“Underwater homeowners aren’t knowingly making bad financial decisions; they just can’t cognitively grasp that they would be better off if they walked away from their mortgages,” he writes. “Most underwater homeowners don’t default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure -- consequences that are much less severe than most homeowners have been led to believe.”

Lenders do not take ethics into account when they decide to loan money. It is a financial transaction. Both you and the bank took a risk. When the risk goes bad for the bank, they run to the government for a bailout. You don’t have that option.

Banks and borrowers do not operate on a level playing field. Lenders set the rules during the housing boom. They offered loans with no documentation, no money down, no income verification, and inflated appraisals. They set up borrowers to fail with adjustable rate, interest only, and “pick-a-payment” loans. These toxic loans created a massive demand for housing and inflated the housing bubble. Now that housing values have collapsed, these same banks are unwilling to reduce the principal on your loan and make it nearly impossible to obtain a loan modification.

“Homeowners should be defaulting in droves,” says Professor White.