What you should know about strategic default

Who would risk the negative impact of defaulting on a mortgage if they didn't really have to? About 17 percent of Americans who defaulted on their mortgages in the second quarter of 2010 did exactly that, according to a study by Experian, the leading global information services company.

"Strategic default" - choosing to stop paying on your mortgage even if you can afford the monthly payments - peaked at the end of 2008 during the height of the Great Recession. At that time, strategic defaults accounted for 20 percent of all mortgage defaults 60 or more days overdue, according to Experian.

And while the percentage of Americans taking this option has steadily declined since then, the credit risks for strategic defaulters remain unchanged.

"Not paying your mortgage will have a far-reaching, long-lasting impact on your ability to secure future credit, regardless of the reason for your default," says Charles Chung, Experian's president of Decision Analytics. "Experian's study indicates that many strategic defaulters continue to faithfully pay on their other debts. Some even purchase other homes for better terms before selectively defaulting on their upside-down mortgage."

If you owe more on your home than its current market value, you may feel tempted to walk away from a bad investment, even if you can afford to make the monthly mortgage payment. But when considering strategic default, you should keep several factors in mind:

* Defaulting on your mortgage is the second most damaging thing you can do to your credit, even if you continue to pay your other bills. Only bankruptcy will affect your credit score more adversely than foreclosure.

* Foreclosure remains on your credit report for seven years. During that time, securing other credit at reasonable terms and rates will be very difficult, if not impossible.

* Potential employers are looking at credit reports. In fact, 60 percent now check applicants' credit reports, according to an article in the Washington Times. By impacting your credit, a strategic default may affect your ability to get a job.

* Last year, Fannie Mae, the government-controlled mortgage giant, said it would implement a policy to prohibit strategic defaulters from getting a new Fannie Mae-backed mortgage for seven years from the date of foreclosure.

* Finally, in some cases, the debt that foreclosure "erases" may be recorded as income, which means you will have to pay taxes on it.

"Some may see strategic default as a way to get out of paying a bad debt," Chung says. "But its associated costs like a lower credit score, higher interest rates and less ability to secure future credits, can wipe out the financial benefit of no longer having a mortgage payment."

To learn more about credit management, credit reports, credit scores and the factors that affect them, visit www.Experian.com.