Ethical Dilemma-Strategic Default

Introduction

In 2010 more than 1.05 million homes were foreclosed on in the United States, up from 918,000 in 2009. It is estimated that 26 percent of these homes were strategically defaulted on by homeowners that were “upside down” in their home equity. Is the decision to strategically default ethically sound? It has been estimated that in 2009 foreclosures cost communities $502 billion and homes that in close proximity to foreclosed homes lose, on average, $7,200 in home value (Center for Reasonable Lending, 2009).

Clarify Concepts

Strategic default is the non-payment of a mortgage obligation by a homeowner that is “underwater” in their mortgage contract and has other meaningful credit obligations on which they continue paying (Tirupattur, Chang & Egan, 2010). A homeowner is considered “underwater” when the mortgage obligation on their property is more than the current market value of the property. Strategic default ultimately results in the property being placed in foreclosure, which is the legal process by which a homeowner’s rights to the property are terminated. A real estate bubble is defined as rapid increases in home valuations that are unsustainable comparative to income and the economy.

Identify Possible Solutions to the Problem

The mortgage lien holder or lender could proactively offer mortgage obligation modification to homeowners in areas most affected by the decline of the real estate market and economic recession. States such as California, Florida and Nevada have experienced property value declines as high as 65 percent in the last four years. Mortgage obligation modification is the suggested solution of the United States Treasury Department, which feels this course of action would end the mortg...

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...ton College of Law, American University, Washington, D.C.

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