We're staying: why Bundle isn't buying the arguments for ditching a mortgage

Mike Dang  |  02:55 PM, Wednesday, February 3, 2010

Buying a house prompts a lot of dreaming and planning-paint chips, school districts, an addition over the garage. One thing that's not generally on the agenda on move-in day: neglecting your monthly payments to the bank, the ones that will keep you in this dream house.

But walking away from a mortgage is precisely what several academics and journalists are advocating for homeowners today, especially for those who are "underwater" on their house, which means they owe more than the house is worth. These are what are called "strategic defaults" — what happens when a homeowner has the money to pay his mortgage, but decides instead to pocket the cash and stick the bank with the house.

It's a bold argument. Prior to the crash of the housing market, walking away from a mortgage was almost unthinkable. But the housing boom and bust upended more than a few longstanding truths about home ownership. Is this one of them? Here are the arguments:

• There's nothing morally wrong with walking away: Welching on a debt is lousy. Period. But, says Mary Kinsley, a lawyer in Phoenix, so is divorce-once a radical breach of community morals in our culture. Why shouldn't walking away from a mortgage be similar? [Podcast: To Stay Or Walk Away, Planet Money]

• Financially, it makes sense: Underwater homeowners might save hundreds of thousands of dollars that they'd otherwise "have no reasonable prospect of recouping in the years ahead," says Brent T. White, a University of Arizona law school professor, whose research on walk-aways prompted much of the current debate. White points out that homeowners who are $100,000 or $200,000 underwater could save money by renting a comparable home at a fraction of their monthly mortgage payments. [Professor advises underwater homeowners to walk away from mortgages, The Los Angeles Times]

• You'll live a better life: Shana Richey, a California schoolteacher who defaulted on her mortgage because she owed $230,000 more than her home was worth. Richey upgraded to a luxury rental for a fraction of her former monthly payment, then took her family to Disneyland and on a Carnival cruise to Mexico. "It's just a better life. It really is," says Ms. Richey. [American Dream 2: Default, Then Rent, The Wall Street Journal]

• Walking away is what a capitalist society requires: This one's a stretch, but: Roger Lowenstein, a journalist who's covered decades of financial crashes and corporate mismanagement, suggests that in a capitalist society, people are only responsible for acting in their own best interests. And if that means walking away, well, that's market efficiency for you. Lowenstein includes Professor White in his story, who argues that if lenders feared an avalanche of strategic defaults, this could produce a wave of loan modifications. Of course, this is just a theory. [Walk Away From Your Mortgage!, The New York Times]

So, should you? Housing experts caution that these are deeply personal, individual decisions-which may be why, despite these arguments, the actual number of people walking away is still almost non-existent. Even given the freedom of a hypothetical poll question, fewer than 1 in 1,000 say they'd mail in their keys if their house lost 10 percent of its value.

Why? Well, maybe because the actual results of defaulting on such a sizable debt can be pretty devastating. It'll destroy your credit record for at least the next seven years, which means if you want a car loan or another credit card soon (to say nothing of buying another house), you're screwed. Second, you might not even be off the hook. Only 12 states protect walk-aways; in the other 38, the lender can potentially sue you for the amount of money lost on a mortgage. Forget the social stigma. Those penalties are serious.

Plus, a lot of people actually like their houses and want to keep them, if they can. And given the consequences, maybe homeowners just don't find being part of an Arizona professor's social experiment is that appealing. Sure, professor White, you first.