When to walk away from a mortgage

By Liz Pulliam Weston

Some people believe that walking away from a mortgage is immoral.

They believe you should do everything in your power to repay your loan, including draining your retirement funds, racking up credit card debt and selling your firstborn. In their view, the lender should have to pry the house keys from your cold, dead -- or at least bankrupt -- fingers.

Others insist that reneging on a mortgage obligation is no big deal. It's a business decision, they say, and nothing more.

As usual, both extremes are wrong.

Most of us know money is more than a matter of numbers. There are ethics involved. Most people feel, or should feel, an obligation to pay their debts. (So should business people, by the way. When ethics depart business, the result is Enron.)

But sometimes, despite valiant efforts, people fall short. In those cases walking away from a mortgage can become, like bankruptcy, the best of bad options. We cross the ethical line only when we choose not to pay, and many of the folks facing foreclosure these days really don't have much of a choice.

The 'walkaway' myth

Oh, sure, we hear anecdotes about folks who stopped paying their mortgages simply because their homes were worth less than they had paid, or less than they owed, even though they could still afford the payments. I even fielded an e-mail from a reader who wanted to commit what I saw as fraud: buying another home at its new, lower price and then mailing in the keys to his current home.

But there's little hard evidence that this is happening on a large scale, as Los Angeles Times writer Michael Hiltzik recently reported in "'Walkaway' borrowers might be an urban myth" (.pdf file). Although lenders warn about the moral hazard posed by solvent walkaways, others say mortgage bankers are trying to shift the blame for the foreclosure crisis onto borrowers' shoulders.

Instead of focusing on homeowners burdened with debt, lenders are spinning the story of homeowners unburdened by conscience.

As Hiltzik reported: "'So many of the loans made were irresponsible -- for the borrowers and for the lenders,' said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County, Calif. 'Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the subprime meltdown as much as possible on their borrowers.'"

Blaming the foreclosure crisis on those who can pay but choose not to is certainly one way to do that. Another is to point to evidence that some borrowers are staying current on their credit cards and car loans while defaulting on their house payments. This, lenders say, is an erosion of the long-standing assumption that borrowers would sacrifice other obligations before falling behind on their mortgages.

Continued: Huge payment increases

 1 | 2 | next >