Putting the kibosh on strategic default

Some see flaws in refi program that relies on write-downs

A strategic default arises when a mortgage borrower who has the capacity to make the payments on his mortgage decides not to pay any longer because of negative equity — the loan balance is substantially larger than the house value. To use the popular terminology, he "walks away" because he is "underwater."

Strategic defaults are distinguished from defaults stemming from a drop in income that makes the mortgage payment unaffordable. However, some defaults have "double triggers" — they are due to the combination of income loss and negative equity. If the borrower has positive equity, a loss of income will in most cases lead to the sale of the property and a payoff of the mortgage, rather than to default. But if the borrower has negative equity, loss of income will result in double-trigger default.