What's wrong with walking away from an upside down house?

In a piece for the New York Times, Ron Lieber explains the benefits of walking away from a home you're underwater on: "In an economic environment like this one, however, the consequences of giving up on your mortgage may not be as painful as they were a few years ago.

Yes, it's almost always preferable to negotiate a better deal on your existing mortgage than to walk away. But if you can't work things out with your lender, you probably won't be sued. You shouldn't receive a major tax bill either. And the damage to your credit will not be permanent or insurmountable."

If you're deeply underwater on a home, recent changes to the law have made it easier to walk away -- and avoid making payments on a home you won't have an equity in for at least another decade.
Recently, a man who plunked down a $300k down payment on a $600k house called in to CNBC's On the Money. The real estate rout has him upside down on the mortgage and he's wondering why he shouldn't just walk away. Felix Salmon of Portfolio.com writes that:

The reaction of the CNBC hosts makes it seem as though Felix had asked whether he should sell his grandmother into slavery. "If you agreed and you signed that contract, you have to stick to it," admonishes Carmen Wong Ulrich. "It's all about that commitment that you made to the house."

I agree with Felix Salmon, and I'm actually appalled by the self-righteous moralizing of the CNBC commentators. Here's my advice: When it comes to something as important as your financial future and a six-figure asset, you have to do what's in the best interests of you and your family. If the lender is rational, they'll agree to a principal reduction and create a win-win where the lender doesn't have to deal with foreclosure and Felix ends up with a house that he doesn't owe more on than its value. If the lender won't do that, he should do what's in the best interests of family: Hand the keys back to the bank. The lender made the loan knowing that it was non-recourse and that if the home declined in value by enough to wipe out the equity, the borrower would have every reason to do that.

Tip to Felix: Pay no attention to CNBC self-righteous posturing and do what's best for your family. The banks are getting plenty of taxpayer money.
Read Full Story
  • DJI25628.90-623.30-2.37%
  • NIKKEI 22520225.84-485.07-2.34%
    Hang Seng25362.88-816.45-3.12%
  • USD (PER EUR)1.11-0.0001-0.01%
    USD (PER CHF)1.03-0.0010-0.09%
    JPY (PER USD)105.26-0.1320-0.13%
    GBP (PER USD)1.23-0.0015-0.13%