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  1. Liam Ferrie

    The least contentious definition would be a home owner for whom the mortgage repayment is readily affordable but who has stopped paying completely and is engaging in a game of chicken with the bank. ‘Strategic’ is an indisputable description of this type of behaviour. There have been some high profile examples of home owners engaging in this type of behaviour but it probably isn’t widespread.
    It starts to get more complicated when you consider the case of a borrower who could, at a push, keep his mortgage payments current but actually pays less than the amount due each month or misses an occasional month. Or a borrower who cannot afford to keep his mortgage current, but who could afford to partially pay, but instead pays zero. To what extent this behaviour is ‘strategic’ will be almost impossible to define. There will certainly be a ‘strategic’ element in most cases because borrowers are aware that the risk of repossession and a painfully drawn out bankruptcy process have decreased dramatically over the past five years. So to some extent borrowers are making a judgement call that the risk of these negative outcomes are low enough to justify the benefit of paying less than they could towards their mortgage. But there will also be non-strategic cases where a borrower has just given up hope and whose non-payment of his mortgage is an absence of action rather than a thought out strategy. He wants to ignore the problem and so tries to avoid having any interaction with the bank. So you could have two borrowers in identical situations, exhibiting identical patterns of behaviour, but with very different thought processes, motivations and levels of mental resilience such that one could be accurately described as a strategically defaulting and the other not.
    In that case we probably need a better description that covers all those who are paying less than they could/should on their mortgages. And even with a more appropriate description the issue of what someone can actually pay is a contentious one. Some lobbyists now argue that private school fees should come ahead of mortgages and that grocery shopping habits and holidays should not be impacted by constrained circumstances. This is a very different mentality from that which prevailed in the 90s and earlier when every other class of expenditure would be pared back to the bone before a mortgage payment was missed. So where to set the bar now? Probably the ISI Reasonable Living Expense guidelines provide the least worst benchmark. They are overly proscriptive in terms of micromanaging the details but as a whole they are not ungenerous. In fact they are probably less restrictive than the self-imposed measures that a struggling borrower would have adhered to a decade or more ago. So the widest definition of strategic defaulter might be: “A borrower who pays less towards his mortgage than would be paid to creditors under an ISI arrangement”.

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