Is it immoral to walk away from an upside down mortgage?

dollarLet's say that you owe $500,000 on the mortgage for a house that, because of the crumbling real estate market, is now worth $200,000.

You can afford to make the payments -- but it feels stupid to write a check every month to make interest payments on a loan for a property worth so much less than you owe on it.

What should you do? In a controversial paper, University of Arizona Law School professor Brent T. White argues that you should stop paying the mortgage, hand the bank the keys to the house, and move on with your life.

In Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, White writes that "most underwater homeowners don't default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure -- consequences that are in actuality much less severe than most homeowners have been led to believe."

The media has been banging the "going into foreclosure is immoral!" drum pretty hard for a long time, and Felix Salmon exposed it for the fraud that it is back in March.

That said, there are a number of fantastic reasons to stay in your house even if you are underwater:
  • Maybe it's your dream house.
  • Moving is a pain in the butt.
  • If you ditch the mortgage, your FICO score will be trashed: Finding a rental may be hard and, if you rely on your credit to finance your lifestyle, you could be in for a problem.
  • If you ditch the mortgage in most states, the lender can sue you for the deficiency.
  • Eventually, housing prices will bounce back and, if your home is your dream home and you plan to live in it for a long time, it will all work out in the end.
  • You may be able to work out a loan modification with your lender to get some of that principal chopped off.
But the bottom line is that homeowners should make decisions about whether to skip out on a mortgage based on their individual circumstances and what makes practical sense for them -- not some conviction that they'll be immoral losers if they go into foreclosure, and that they have some moral obligation to sacrifice their financial future at the altars of Fannie and Freddie.

If you think you're doing something noble by starving your kids' college funds so that you can make payments on a house you'll never have equity in, I think you're badly misguided.
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