Strategic defaults refers to people walking away from mortgages they can afford because they no longer make economic sense.
After buying their Phoenix bungalow three years ago for $400,000, Jean Ellen Schulik and Danny Kuehn watched its value drop to just $85,000. Even though they can afford the mortgage payments, they felt they were trying to bail out an ocean with a bucket.Given that a $400,000 mortgage will cost you more than a million dollars to pay back over 30 years, it is hard to blame them for walking away. Except I wonder if the terms of the contract will enable the banks to go after them. (Assuming Congress doesn't mess with the contracts - or at least try.)
"No logical business person would do anything other than walk away," they told CBS News' "60 Minutes."
The situation is pretty serious.
Right now, more than 10% of borrowers are 25% or more underwater on 4.9 million mortgages. The total valuation could saddle banks with as much as $656 billion of bad loans, according to the latest report from Corelogic.Another 10 percent of mortgages going bad would be pretty hard to deal with.