Contrary to what you may have read, it appears that strategic defaults may actually be declining.
Today Nick Timiraos of the Wall Street Journal wrote an interesting piece about strategic defaults that suggests that almost one in five mortgage defaults through the first six months of 2009 were of the strategic variety. Strategic default is when someone has the money or income to pay their mortgage but decides it no longer makes financial sense to pay the mortgage (usually because their home is worth far less than they owe on their mortgage).
The article discusses a study from Experian and Oliver Wyman that says that strategic defaults actually peaked in 2008 (which just goes to show that by the time the media has picked up on a trend, that trend is usually over). It turns out that there was a decline in strategic defaults in the first and second quarters of 2009. The study has not yet looked at the remainder of 2009 to see if the decline of strategic defaults continued.
The study also found that high levels of strategic default correlates with areas that had the largest decreases in property values. This is not especially surprising, because housing price declines are the primary motivating factor for strategic default.
This comes after Fannie Mae announced last week that it would implement policies to punish those who strategically default, denying strategic defaulters Fannie Mae loans for seven years. It is not yet clear how Fannie will identify strategic defaulters.
It will be interesting to see what happens the report is updated. If home prices continue to decline, as many people are predicting, we could see an increase in strategic defaults. If, somehow, home prices stay the same or increase it is likely we saw the highest levels of strategic default already.
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