Unless you’ve been living under a rock for 2010, strategically defaulting on your mortgage is a growing trend among Americans. Both by business owners who strategically default because “it’s good business“, but also by Joe Public homeowners who, somewhat disingenuously, have been psychologically conditioned to believe that it’s immoral to default on your mortgage.

But what you probably haven’t heard about, is that (according to the WSJ video below) many real estate deals between professional real estate investors, REITS, and various other types of real estate business entities included a nonrecourse clause in their transaction. (These are also popular with seasoned residential real estate investors who use owner financing or seller carryback financing.)

A nonrecourse clause essentially means that in the event of default, the lenders sole recourse shall be against the property and there shall be no personal recourse against the borrower. Meaning, his credit report isn’t damaged, he can’t be harassed by creditors, etc. (What it does to his business reputation, however, is a completely different story.)

So he has the ability to return the keys to the lender via “jingle mail” any time he chooses. Of course, he will likely forfeit any down payment made on the property at closing, but as we all know, there weren’t a heck of a lot of real estate deals that required a substantial down payment during the upside of the real estate bubble. In effect, these nonrecourse clauses effectively acted like a call option allowing the real estate investor (or flipper) to buy in to the bubble without risking significant capital, while maximizing his upside for future profits.

So it’s basically a win-win-halfway lose scenario:

1. If his property goes up in value – he makes money.
2. If he’s cash flow positive – he makes money.
3. If the property values becomes less than the mortgage (e.g. underwater) or cash flow turns negative for several months – he simply mails back the keys.

Pretty sweet deal, really, when you consider it is how easy it is to justify walking away when you know you’re not going to be sued, not going take a hit on your credit report, and you’ve got a sizable legal department to back up the “it’s just good business” decisions made from looking at the red ink on a spreadsheet.

Video 1: WSJ on strategic defaults by major corporations (Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc.)

Video 2: Henry Blodget discussing the double standard between corporations and their “good business decisions” justifying strategically defaulting on their mortgage versus Joe Public homeowner and the “immorality of defaulting on a mortgage”.