As the housing market has declined in recent years, many individuals have seen the value of their homes decrease dramatically. As many people lost jobs and had difficulties paying their mortgages, a number chose foreclosure by employing a tactic called "strategic default" in order to avoid losing more money on their home investment.

In a strategic default, a homeowner who owes much more on a home than it is worth makes the decision to stop paying their mortgage under the theory that the existing mortgage is essentially just a bad investment. Eventually the borrower defaults on the loan and the home goes into foreclosure.

The upside of this plan for the borrower is that he or she can use the money saved by not paying a mortgage to pay other bills or keep up with other debts. Since it generally takes several months, or even or year, to foreclose on a home and evict the tenants, the borrower could essentially stay in the home quite some time before being forced to leave.

Of course, there are some serious downsides to this strategy as well. For one, the borrower will have a foreclosure on their record. In addition, the foreclosing bank may seek a deficiency judgment against the borrower, in effect, holding them responsible for the balance of the mortgage after the home is sold at a foreclosure sale.

Recently, another downside has become apparent as Fannie Mae, one of the largest financers of homes in the country, has said that it will make it more difficult for those that engage in strategic defaults to get loans in the future. While borrowers who actually tried to pay their mortgage but failed would be able to get another loan within two or three years, a strategic defaulter might be barred for seven years.

Freddie Mac, another large financer of home loans, already bars strategic defaulters from obtaining new loans for five years. Things may get even worse for those using this tactic, because there is legislation pending in Congress that would permanently ban strategic defaulters from obtaining FHA loans.

Related Resources:

Fannie Mae gets tough on homeowners who walk away (Los Angeles Times)