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Strategic Defaulters Are Deadbeats   June 7th, 2011
Getting tired of the term "strategic default."       

 
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If you are financially capable of paying your debts but you choose not to do so, you are a deadbeat. Period.

Should you keep paying your mortgage on a home that's dwindling in value?

No way, say an increasing number of underwater homeowners who are voluntarily choosing to "walk away" from their home loans, a practice known as "strategic default."...

The profile of a typical strategic defaulter is not what you'd expect, said Peter Ticktin, a Florida-based attorney, whose firm is handling 3,000 foreclosure cases.

"Because they borrowed money and stopped paying their loans, you would think they're deadbeats -- but it's not like that," Ticktin said.

In fact, most are good credit risks with high FICO scores, according to Andrew Jennings, chief analytics officer at Fair Isaac (FICO), the company behind FICO...

"Strategic default can be a financially sophisticated thing to do," said Mark Fleming, chief economist for CoreLogic, the financial analytics company. "And it makes sense that more financially savvy people do it. They may treat their mortgages like they would their investment portfolios -- in a financially ruthless manner."


In this world where politically correct speech has many people watching exactly what they say--and which only heightens the truth of "words mean things"--I think it's a travesty that this practice is called a "strategic default." They should be called "strategic deadbeats."

Or, really, just "deadbeats." Using the word "strategic" makes it sound less bad when it's really worse.

Seriously, do you know what's worse than someone that fails to pay their debts when they don't have the money? I'll tell you: Someone that fails to pay their debts when they do have the money.

In the case of a "strategic deadbeat," the deadbeat borrows money to buy a house, and the value of the house goes down. So the deadbeat says to the person that trusted him with the loan, "I know I borrowed hundreds of thousands of dollars from you, but I made a bad gamble with that money. I'm not going to pay back what I owe, instead I'm just going to leave you with this house that's worth less than what I owe. Good luck maintaining it and selling it."

Let's personalize this a little: What if someone you don't know asks to borrow $1000. You want to make a little money so you pull his credit report and it turns out he appears to be a good risk. You loan him $1000 in cash. He takes that cash and buys a thousand lottery tickets and loses. He then informs you that there's no point in him paying you back because the lottery tickets are worth less than what he owes. So he drops the useless lottery tickets on your doorstep and refuses to pay you back.

Yep, that's a deadbeat. Doesn't matter what his FICO score says, he's a deadbeat.

In fact, he's more of a deadbeat than someone who borrows the $1000 and is simply unable to pay it back because they lost their job. At least there's a reason why that individual isn't making good on his promise.

But someone that has the means to pay back a loan they promised to pay but chooses not to because of their own bad gamble is the ultimate deadbeat. Only a disgusting sense of entitlement and a lack of ethics could drive someone to borrow someone else's money to make an investment and then not make good on that obligation even though he has the means to do so. It's an attitude that says that if the investment goes well, the borrower wins--if the investment goes poorly, the lender loses.

I hope at some point the FICO score is actually modified so that "strategic deadbeats" are penalized even more than those that defaulted due to financial hardships.

I, for one, would consider loaning money in the future to someone who had a great credit history until he fell on hard times during this hard economy. But I would never loan money to someone who has a history of defaulting on debts they are capable of paying, and leaving the lender with the losses of his bad investments.

Closing thought: It will be breathtaking if the country eventually suffers high inflation that drives up the prices of homes and then the strategic deadbeats turn around and try to reclaim "their" homes now that the properties are worth more than the loans. I'd be at a loss for words to describe a person that did that.

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