Walk Away From Your Mortgage?

The housing bubble burst four years ago yet millions of people are still faced with the dilemma of what to do with their homes that are worth less than what is owed on the mortgage.  Should these people walk away from their homes and let the banks deal with the problem?  Should they hang on as long as they can afford the mortgage payment and hope that prices recover soon?  Is the decision to walk away strictly financial or should the morality of breaking a contract also be a consideration?

With strategic delinquencies/foreclosures rising The New York Times published an article November 8th that suggests people should look at the decision to walk away from their homes as a financial one.  The article quotes Nicolas Retsinas from the Joint Center for Housing Studies at Harvard as saying that “if a home is a financial asset” it should be evaluated as such.  Therefore, if it makes sense to walk away from your home from a financial perspective then you should.  Which is just what two men featured in the article did along with a growing number of people in some of the wealthiest zip codes in the United States.  Although the author made the consequences of their decisions sound insignificant there are some very real consequences to allowing a home to go back to the bank.  The first and most obvious is the hit to your credit score and the uncertainty of how it will affect your ability to borrow money.  Then there is the matter of loss of down payment.  One gentleman in the article lost any chance of ever recovering his $90,000 down payment when he decided to walk away from his house.  Taxes would normally be a financial consideration in the decision to allow a bank to foreclose but the Mortgage Forgiveness Debt Relief Act removes taxes from the conversation through 2012.  If the act is not extended beyond 2012 then a tax professional should be consulted as part of the decision making process because some of the mortgage “forgiven” could be taxable.

The question of whether or not willingly walking away from your mortgage is morally right (or wrong) is more difficult to discern.  Neil Cavuto of Fox News argues that “leaving someone else stuck holding the bag” isn’t a good thing.  His politics aside, it appears that many people feel the same way.  There has certainly been ample opportunity for people who owe more than their homes are worth to walk away.  Especially now that the stigma of letting a home go back to the bank has diminished to slight embarrassment.  There must be a reason that only 25% of all foreclosures are strategic.  Could it be morals or just that it doesn’t make financial sense?

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About Dan Seim

Dan Seim is the primary contributor to Preferred Residential's blog. He has been writing about real estate issues that affect home owners in Bend and Central Oregon since 2011.