Strategic Default

Strategic defaults occur when individuals choose to stop paying their mortgages even though they are financially able to do so. Members of this group are relatively easy to identify because they continue servicing their other significant debts. By contrast, nonstrategic defaults are caused by individuals who are willing to pay their home mortgages but are unable to do so. Separating strategic from nonstrategic defaults is important for purposes of public policy because their motives are different. Therefore, effective solutions for one group (e.g., loan modifications) may be less effective, or ineffective, for the other. Despite widespread concerns about strategic defaults, they have been a clear minority of the total but have the potential to grow significantly.

Moral controversy surrounds strategic defaults, because many individuals treat their ...