Is It OK to Walk Away From Your Mortgage?

By on

This post comes from partner site Girls Just Wanna Have Funds.

What happens when the value of your home drops below 50 percent of your mortgage balance? Should you continue paying into an investment that’s essentially worthless? Or should you be able to give it back to the bank in exchange for being released from the loan while taking a hit on your credit report? What if you can afford the payments, but you don’t feel that the investment is worth it?

This is the other side of the debate that no one really talks about: The homeowners who can afford the home, but plan to strategically default due to declining values and a mortgage that’s underwater.

The New Yorker published a story called Living by Default that ever-so-neatly delved into this issue…

It is now generally accepted that when it’s economically irrational for a company to keep paying its debts, it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe 40 or 50 percent more than the value of their homes.

In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month. … So for many of them the rational solution would be a “strategic default” – walking away from the mortgage and letting the bank take the house.

Obviously there are two sides to this debate: homeowners who see this as a business decision vs. those who feel a moral obligation to continue throwing good money after bad. Who wins? And who’s right?

Felix Salmon from Reuters.com poses an interesting counterpoint to The New Yorker’s assertion that more homeowners should strategically default in order to level the playing field…

I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But…I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. The question, of course, is whether we can ever return to the status quo ante.

Richard Barrington then chimes in with the unintended consequences of the De-Occupy Your Home movement described by The New Yorker…

To really understand the unintended consequences of the Occupy Our Homes movement, you have to think of the people on the other side of the issue. After all, it’s not just banks that are hurt when people fail to meet mortgage obligations. Other victims could include:

  1. Future mortgage borrowers. Especially at current mortgage rates, banks have little enough incentive to make new loans these days. If they are blocked from collecting on their loans, future borrowers can expect mortgages to be more expensive and/or harder to obtain.
  2. Current homeowners. For the same reason as the above, the actions of Occupy Our Homes may make it tougher for current homeowners to refinance their homes. Ironically, the more homeowners can take advantage of current mortgage rates, the fewer would have to face foreclosure.
  3. Depositors. Low interest rates on savings accounts and other deposits are partly the result of weak profits in the lending business. Erode those profits even more, and you can forget about seeing those interest rates rise anytime soon.
  4. Bank shareholders. No, don’t think about rich one-percenters. More likely, bank shareholders are pensions and 401k plans, whose participants are ordinary people. When borrowers don’t meet loan obligations, those shareholders can take the hit.

In short, the Occupy Our Homes movement seems to demonstrate that good intentions don’t always make for a good cause.

All three are valid perspectives, which make for a hearty debate around whether or not one should strategically default on their credit obligations in the face of declining asset values. Homeowners today face tough decisions that draw on morality that breeds a sense of obligation. All while making a decision that could have deep consequences for their financial future.

Follow Girls Just Wanna Have Funds on Facebook and Twitter.


Editor’s Note:
To read Stacy’s take on strategic foreclosure, check out his post called Website Says It’s OK to Walk Away – No It Isn’t.

Sign up for our free newsletter

Like this article? Sign up for our newsletter and we'll send you a regular digest of our newest stories, full of money saving tips and advice, free! We'll also email you a PDF of Stacy Johnson's "205 Ways to Save Money" as soon as you've subscribed. It's full of great tips that'll help you save a ton of extra cash. It doesn't cost a dime, so why wait? Click here to sign up now.

Check out our hottest deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,345 more deals!

Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.