According to a 2009 study titled "Moral and Social Constraints to Strategic Default on Mortgages," 81% of their respondents thought it morally wrong to default on a mortgage when you can afford to pay it.  The study, conducted by Luigi Guiso (European University Institute), Paola Sapienza (Northwestern University), and Luigi Zingales (University of Chicago) determined that moral belief, rather than economic consideration, stopped most people from strategically defaulting on their property.

According to the study, "the most important barriers to strategic default seem to be moral and social.  Ceteris paribus, people who consider it immoral to default, are 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so.  While moral attitudes toward default do not seem to be affected by the surrounding environment nor by the anger people exhibit vis-a-vis the current environment, the social pressure not to default is weakened when homeowners live in areas with high frequency of foreclosures or know other people who defaulted strategically.  Our results suggest that these contagion effects should be seriously considered in public policy regarding housing."

The feeling that strategic defaults are somehow immoral is understandable if you think that the system wasn't designed for them.  One might think to themselves, "I have a moral obligation to fulfill my contract with the bank.  A short sale cheats the bank out of the money I promised them per the terms of my mortgage, therefore, I shouldn't do it." However, the banking system is not only designed to handle strategic defaults, but such defaults are acknowledged and anticipated in your mortgage. 

When a homeowner enters into a mortgage agreement with a bank, both the bank and the homeowner are entering into an agreement whereby both are taking a risk on the assumption that home values will increase.  The expectation is that, in the end, both the homeowner and the bank will "win" in the deal.  In 2006, Congress legislated sweetheart deals that motivated banks to make millions of very risky bets in the form of loaning sub-prime Adjustable Rate Mortgages (ARMs) to people who never should have been able to qualify for a loan.  The sudden spike in potential buyers acted as a catylast in the housing market driving up home prices and building. 

Then the rates on the ARMs adjusted to extreme rates, people defaulted on their mortgages, unemployement rose to record levels, and the housing market crashed.

Homeowners who responsibly managed their finances suddenly found themselves the owners of homes worth tens of thousands, even hundreds of thousands less than the amount they were currently paying for the property.  Congress and the banks initiated the market downturn, and homeowners are left to suffer the consequences.  The "win-win" deal you and the bank entered into when you signed your mortgage is now a "lose-win" greatly in favor of the lender who is often receiving a tax write off for cancelled debt, a troubled investment off of their books, immediate liquidity of the investment upon the close of the short sale, and potential profits from the new homeowner's interest payments. 

Strategic defaults are a legal means by which homeowners underwater on their mortgages can, just like any business decision, stop making payments on an unprofitable investment.  Every homeowner has the legal right to default built into their mortgage.  When the market crashes, homeowners shouldn't be the only ones who suffer the consequences of a failed risk.  With a strategic default, the consequences of the failed risk is spead between the two consenting parties- you and the bank. It really is that simple.

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