The Votes Are In

Check out L.A. Land's reader opinion poll: Is walking away irresponsible or wise? The question is whether it is OK to walk away from a loan if you are upside-down (you owe more on your mortgage than your home is worth). About 60% of readers consider it to be OK, versus 40% who think it is not. Here are some of the comments:

jb said:

I agree with Keith and others - the contract is being fulfilled by walking (I will either pay the mortgage OR the bank will take the house).

Our government is pulling out all stops, trashing the dollar, simply to save banks. Let the banks fail, they used the full power of highly paid risk management professionals who then bought these mortgages like crack addicts. Someone please start a new bank called Post Housing Bubble Bank (PHBB) - I will send you all of my cd's even for a lower rate than others. You can replace WaMu and the like when they fail - as they should.

Dr. JwB comments:

I've been pondering and not commenting on this issue because I'm trying to decide if what I would do (walk away) makes me a terrible person.

Now the questions are: Given that the transaction cannot be undone, what does the least damage to this family? Does avoiding that damage justify the damage this does to other people (and what is that damage)?

The bank gets the house, which was agreed by both parties as fair value for the loan. The market gets a foreclosure sale at what would in theory be a more reasonable price (sooner rather than later). The family gets a ding in their credit, and maybe loses a little sleep because of guilt.

So what am I missing?

and goodfaith points out:

Strikes me that for homeowners who are underwater, this is a classic "efficient breach" of a contract... very basic contract law. It happens sometimes that it makes more sense to not follow contractual obligations because economic circumstances have changed. This is why in contract law there aren't punitive damages even for intentional breach of contract. So walking away, and incurring the known consequences of breach--foreclosure and reduced credit rating--is the rational way to do things, and I don't have a problem with it.

I think people do have a problem with people who "buy" homes with no intention of ever making a payment, and have basically entered into the mortgage contract in bad faith, expecting to game the system by taking advantage of mortgage law by living in a place for 12 months before it gets foreclosed. Should there be some extra liability for that kind of behavior? Maybe. But previous commenters who said that banks entered into these extremely high LTV deals knowingly is correct--they were sophisticated enough to know better.

The votes are in. If you're willing to take your lumps, i.e. you give back your house and get a very bad credit rating for a while, then do what you have to within the bounds of the law and the contract. Take care of yourself. The banks and hedge funds are certainly looking after themselves.