STRATEGIC DEFAULT

WHAT IS STRATEGIC DEFAULT?

A strategic default is the decision by a borrower to stop making payments (default) on a debt despite having the financial ability to make the payments.

This is particularly associated with residential and commercial mortgages, in which case it usually occurs after a substantial drop in the house’s price such that the debt owed is (considerably) greater than the value of the property — the property has negative equity or is “underwater” — and is expected to remain so for the foreseeable future, such as following the bursting of a real estate bubble. Such borrowers are called “walkaways.”

- Definition courtesy of Wikipedia

Recent proposals to change lending guidelines seek to penalize walkaway borrowers by not allowing them to obtain new mortgage for up to 8 years after a Strategic Default.  Be wary of companies encouraging you to Strategic Default.  They may not be looking out for your long term goals!