MODULE 59: “Strategic Defaults” and Foreclosures
Core Module Issues:
• What is a “strategic default”?
• Does a person behave ethically is he decides to make a strategic
default?
Module Teaching Notes
This is the last module in the “Great Recession” unit, and it examines a relatively new phenomenon that is
driven by people who are in massive debt and must make selective choices about which bills to pay.
In generations gone by, people seemed to automatically rank their mortgage payment as their most
important bill. But today, a growing number of people are actually more worried about losing their credit
cards than their homes. And so, some people’s “strategy” is to pay credit card minimum payments first,
even if that means defaulting/missing mortgage payments.
In a way, strategic defaults amount to a game of chicken. Banks usually lose a substantial amount of
money when they foreclose, especially on an “underwater” property. Total losses can average as much as
$50,000 per property. And so it is almost as if some buyers, recognizing this fact, are daring lenders to
foreclose over missed payments. They are betting (and they are often correct) that banks will prefer to give
them more time or will accept some missed payments rather than face a large loss after a foreclosure.
Of course, the bet is often lost. Banks follow through and foreclose, and strategic defaulters lose their
home.
This module looks at the ethical issues on both sides of the game of chicken.
Discussion Points for Scenario Questions
1. If you were Ann, which of the four houses would you foreclose on and which would you give
more time? Why?
123 Oak Street Foreclose // More Time
123 Pine Street Foreclose // More Time
123 Birch Street Foreclose // More Time
123 Elm Street Foreclose // More Time
[LET THE STUDENTS GIVE THEIR ANSWERS AND RESPOND TO ONE
ANOTHER.]
2. Would your answers to the first question change at all if the economy were significantly
better than it is currently? What if it were significantly worse?
A. SAME ANSWER ALWAYS – PEOPLE SHOULDN’T GET “MORE OF A
BREAK” OF TIMES ARE BAD?
3. If you were in Tom and Ellen’s position, would you give priority to making the mortgage
payment or making the credit card payments? Why?
A. MORTGAGE – WHY? IS A HOME THE MOST IMPORTANT THING?
B. CREDIT CARDS – ARE YOU “ADDICTED” TO CREDIT CARDS? WOULD
4. Debt trade-offs aside, could you survive without credit cards if necessary? What would be
the biggest problems you would have if you no longer had credit cards?
A. COULD SURVIVE – BUT WOULD IT BE A PAIN?
B. COULDN’T DO IT – FOR WHAT SPECIFIC REASON(S)?
5. During the recession, some lenders have “frozen” foreclosures for a time, which means that
they have suspended all foreclosures for weeks or months. Some state governments have at least
considered requiring statewide freezes. Are such policies reasonable during an economic
downturn? Would they be better or worse if they were required by the government?