The Strategic Default: Should you hang onto a property when its value no longer supports your long-term investment criteria? Several readers wrote in this past week with questions on this topic. Thanks to all who did.

As the worst economy in our lifetimes challenge household budgets, a term we hear more frequently is “Strategic Default.” What is it? Simply put, the owner of real property who has the capability to continue making payments decides not to. The homeowner concludes their property will not regain enough of its value in a reasonable timeframe to make it a viable investment and disposes of it through short sale, deed in-lieu, or foreclosure. All constitute a strategic default because the owner’s action in liquidating the real property is by choice.

Struggling families who have lost their homes no doubt look at these discretionary forfeitures as madness. Really, who would voluntarily walk away from their own home? Well, surprisingly more and more homeowners are doing just that and many more will be faced with the question as long as current economic conditions prevail. Growing numbers of wealthy borrowers have joined the stampede of genuinely-strapped homeowners dumping over-leveraged properties faster than Big Banking can say “Loan Modification DENIED.”

Because Big Banking already spins this issue in an attempt to claim victimhood, let me offer a more realistic point of view.

When you finance a home in California your original purchase-money loan is a “non-recourse” debt. This means that the only security the lender has is the property itself. Your loan documents detail terms of repayment and offer a litany of punitive measures meant to ensure you keep making payments, but in reality foreclosure is the lenders only remedy should you decide to stop making payments.

This consumer protection became law in the aftermath of the Great Depression when ruthless lenders relentlessly attached the non-real estate assets (and future assets) of the same people whose homes they’d just repossessed through foreclosure. Sound familiar?

During the go-go real estate market of the mid 1990’s to 2006, the Clinton and Bush administrations continued the boom by relaxing criteria for government-backed loans. Not to be outdone, Big Banking followed suit with stated-income loans and the now discredited Option ARM/Interest Only programs. But boosting homeownership was not the real goal of Big Banking. We know now that the millions of new loans created were just fodder for mortgage-backed securities and a scheme to further enrich the banking industry.

The affect of these dubious loans was that millions of Americans bought homes they would not normally have been able to buy. We should not lose sight of the huge overall benefit to society this new surge of home-ownership created. Yes, a portion of these homes will be lost in the current crisis but many more will come through with their dream yet in tact.

So who’s really at fault here? Overreaching homebuyers who inflated their income on loan applications? No. Unscrupulous mortgage brokers and underwriters? Nope. The pressure to approve these marginal loans came from above and culpability for the current crisis is laid correctly on the marble stoops of Big Banking.

Potential homebuyers enticed by the very real desire to attain the status and security of ownership, naively signed up for loans that were often fraudulently described and obtained. When President Obama demanded loan modifications from Big Banking, Americans got little more than massive frustration. Many a family has spent their last dime keeping payments current on a property they were convinced was about to have its loan modified voluntarily by a bank. The vast majority (some estimates exceed 95%) are denied. This week, a suit seeking class action certification was filed in Arizona claiming one major bank purposely misplaced or destroyed the files of homeowners seeking modifications.

Saddled with properties so far underwater that Bob Ballard couldn’t find them and denied relief by government and Big Banking, homeowners considering strategic default often go down the same logic path:

My income, assets, and retirement portfolio are a fraction of what they used to be.

My home will not likely return to its former value any time soon.

My Option Arm/Interest Only/Adjustable Rate loan is due and must be refinanced in (for example) two years. My home will not appraise at a value sufficient to refinance.