Underwater Mortgage: Is It OK to Walk Away?

In spite of the mild economic recovery we’re experiencing, the percentage of homeowners who are underwater on their mortgages — that is, they owe more than their homes are worth — has barely budged.

According to new data from CoreLogic, 22.7 percent of homes with mortgages were underwater in the first quarter of this, versus 23.1 percent in the fourth quarter last year. Nevada is by far the worst off, with 63 percent of mortgaged homes underwater; Arizona, Florida, Michigan, and California round out the top five.

So the question is this: If you owe $500,000 on a home that is only worth $150,000, is it OK to toss your keys back to the bank and move into a cheaper rental, instead of diligently paying down a mortgage that is completely out of whack with the value of the house?

CNNMoney recently highlighted a few companies that walk “homeowners” through the process of walking away from their mortgages, and there are a number of practical considerations that might make it a bad idea. If you live in a recourse state, the lender might sue you for the amount of the mortgage that the sale of the property you give back to them doesn’t cover. So if you owe $500,000 on the mortgage and the bank only recoups $150,000, they might come after you for $350,000 in a lawsuit if you have that money available in non-retirement assets. So walking away in a recourse-state is probably not a good idea if you have a lot of money.
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But in non-recourse states — Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington — the bank has no recourse beyond the repossession of the property.

There are, however, ethical considerations. George Brenkert, a professor of business ethics at Georgetown University, told The Wall Street Journal a couple years ago that people have a moral responsibility to pay their mortgages, and the Mortgage Bankers Association’s CEO made the same case: “What about the message they will send to their family and their kids and their friends by defaulting?” Then, in the ultimate act of hypocrisy, the MBA walked away from its own mortgage on its corporate headquarters for exactly the same reason.

Here’s why I think it’s perfectly fine to walk away from your mortgage if, after evaluating all the factors, it’s the best financial decision for your family: You are acting within the bounds of the contract in a situation that no one had predicted. No one put a gun to the mortgage industry’s head and ordered them to make loans in non-recourse states in the midst of a housing bubble. If the situation you’re in means that it makes sense to walk away from the mortgage, that’s not illegal or even immoral: It’s the predictable outcome of the way these loans were written. No need to make yourself a martyr out of obligation to your family, or your bank

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