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Ever since the subprime lending market began its decline about three years ago (there were strident warnings about subprime in 2007, a full year before the global financial crisis) there has been something of a debate surrounding whether or not foreclosure might actually be a smart financial move in some situations. There is even a name for a foreclosure done on purpose: “strategic default.” There are, of course, issues surrounding the idea of strategic default, and anyone deciding that foreclosure is the smart play will have to work through those issues.

When Foreclosure Might be Attractive

Many people are finding themselves underwater on their mortgages, and wondering what to do. For those who can still afford the payments, and plan to stay in their homes for years more, foreclosure is not the answer; building equity and riding out the current market conditions is the way to go. However, for those who are underwater, in trouble with bills, and unlikely to recover from the current troubles, strategic default is becoming more and more attractive.

One of the main reasons, according to a May 31 article from The New York Times, is that the large amount of distressed homes in the system is creating a backlog. The article cites figures from LPS Applied Analytics that show that the average borrower in foreclosure is delinquent for 438 days before eviction takes place. You could be in your home for more than a year, without making mortgage payments. For some, living “rent free” in this manner is a good way to shore up the finances, since they can use that money to pay down other debt, pay bills, or even build an emergency fund by saving what you can.

Credit Score Devastation: The Downside of Strategic Default

Of course, if you are delinquent on your home, that means that your credit score is going to drop. A foreclosure can mean a 300 to 400 point drop in your credit score in some cases. Plus, it stays on your credit report for seven to 10 years. It would probably take at least three years (and probably four or five) of good behavior moving forward to be able to buy another home. If your credit is already shot, and you are prepared to be in the doghouse with lenders for a few years, you might not mind so much. But if your good credit is important to you, it’s a good idea to do what you can to avoid foreclosure.

The Moral Implications of Strategic Default

Another consideration is the morality associated with foreclosure. How you feel about foreclosure can affect whether or not you do it, especially if you don’t feel that strategic default is “right”. On the one hand, you have those that point out that you should only foreclose as a last resort, since you did borrow the money and are morally obligated to repay it. On the other hand is the argument that the banks themselves often behaved in a greedy and immoral manner just to get you a loan. Do you really have a moral obligation to a corrupt system that hoodwinked you in the first place?

The debate about strategic default is likely to go on. And, while it is clear that in some cases cutting your losses, and staying in your home as long as possible before eviction, might be financially advantageous, there are other considerations.

Do you think that strategic default can be a smart move? Would you consider it?