Recently we have been hearing the words "strategic defaults" in the marketplace. The idea is that about 25% of all defaults currently are strategic defaults.

Strategic defaults are when a homeowner, who can afford to pay their mortgage payments, elect to walk away for their homes. The reasons vary but they largely evolve around the homes are substantially worth less than what is owed on the property. The thought process assumes that homeowners will not default on their mortgages as long as they can afford the payments.

In the article by Guiso, Sapienza and Zingales called "Moral and Social Constraints to Strategic Default in Mortgages, the authors distinguish the difference between strategic defaults and what are ordinary or forced defaults. The "ordinary" or "forced" defaults occur when the homeowner simply can't make payments. They further explained "strategic defaults" are when the homeowner chooses to walk away even thought they can make the payments.

There are moral and ethical issues which come into play here. The homeowner believes they and the lending institution made a good faith agreement that if the institution provided the moneys to purchase the home, the borrower would repay the loan with interest.

There is a time when the borrower decides not to continue to "throw good money after bad." They need to ask themselves: Why would a prudent person ever throw good money after bad?

In the author's survey, 81% of the respondents agreed that "it is morally wrong to walk away from a house when one can afford to pay the monthly mortgage." Moral considerations may be overridden by financial realities. When those respondents were give hypothetical scenarios, thoughts were reconsidered. When they were posed with the scenario that the equity in the house was greater than $50,000, 20% of those, who think default is not morally wrong, would walk away, whereas only 7% of the "moral" ones would. If the equity was negative by $100,000, 22% of the "moral" ones would walk. However, when the home was upside down by $200,000, 37% of the "moral" group would walk even though they thought it was morally wrong.

Recently we have seen estimates that range from 25% to 48% of all Americans have mortgage loans which are greater than the value of their homes. When those homeowners start having their adjustable mortgage rate increase as the economy improves, the pressures for those homeowners will escalate.

Presently, the vast majority of these homeowners are still struggling with the moral and social issues.. When those homeowners start having their adjustable mortgage rate increase as the economy improves, the pressures for those homeowners will start pushing them to look for other avenues. As more and more homeowners get frustrated with paying for something worth less than they paid originally, the moral and social stigma becomes lessened. If they start hearing stories of the relief the prior homeowners feel from getting out from such a big liability, they might be inclined to do the same.

If this should start to occur, in spite of all the work being done with loan modifications, it will put further pressure on the government and banks to go through another program. We have seen what government intervention has done, but the financial community can not stand another financial meltdown.