What is Strategic Default?

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Desperate times may call for desperate measures strategic defaults are just one of them.
According to the Wall Street Journal "A new report estimates that nearly one in five mortgage defaults through the first half of 2009 were "strategic," where borrowers who appeared to have the capacity to pay their mortgages stopped doing so.
" Strategic defaults are a type of strategy where distressed homeowners opt to walk away from their mortgage and fiduciary responsibilities despite having the assets to pay the bills.
Strategic defaulters stand out of a crowd as they intentionally choose not to pay six mortgage payments but still manage to pay their other bills such as credit card debt instead.
The unusually trend is extremely popular in those states hit incredibly hard by the real estate boom and bust such as California and Florida.
Those states have some of the highest strategic default rates on records and statistics comparing the first two quarters of 2009 versus 2005 have indicated that the defaults rates in California had increased by 80 times.
Mortgage giant Fannie Mae is taking action to to stop the trend and will pursue legal actions against the culprits of this crime.
A recent press release from the company announced the changes in loan procedures.
Other actions being implemented by the government owned mortgage provider included denying loan applications from strategic defaulters for up to seven years and requiring a total of seven years time (currently set at five) before they approve alone for those who previously lost their homes from foreclosure proceedings.
Most the homeowners choosing the strategic default option because their homes are now underwater (meaning they owe more money on the properties then they are currently worth).
Homeowners who are upside down on their loans may feel that walking away is the only viable option as they are having great difficulty refinancing loans.
Although opting to utilize a strategic default strategy may be a logical decision, the debate exists as to whether or not the act is ethical.
There are several ethical situations unique to strategic defaults.
Walking a way from a financial obligation is a breach of contract.
The financial losses caused by strategic defaults are going to be passed on to innocent bystanders in the form of fee increases.
Additionally, abandoned homes can negatively impact the property value of entire neighborhoods.
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