In the wake of the housing bubble and the lingering economic downturn, 23% of homeowners now owe more on their mortgage than their home is worth. Many are so far underwater that they have no reasonable hope of creating equity until the housing market fully recovers. For the hardest hit areas, this could take over ten years. Thousands of underwater homeowners are able to make their mortgage payments, but they’re grappling with the possibility that it may not be the best use of their money.
More than ever before, people in this position are choosing to strategically default, or “walk away.” This decision has severe effects on one’s credit rating, but people are more and more willing to take the hit, opting to rent for drastically cheaper rates. In a letter to NPR’s Planet Money blog, one homeowner described how staying in his home doesn’t make sense: “If house prices climb by 5% a year, it’d be 15 years before we broke even … We can rent for half the price. Over the 15 years to break even, it would cost us $12,000 a year in extra payments for no equity and we’d be trapped in the home.”
The issue of walking away has been discussed from many angles. Often creeping into the dialogue is the question of morality: isn’t it wrong to abandon a loan and shirk one’s financial obligations? Homeowners are increasingly demonstrating that they don’t think so. One factor is the prevalence of foreclosures. Experts suggest that defaulting on a mortgage was once seen as a sign of irresponsibility. Now, however, foreclosures are commonplace, and this stigma has diminished. People are more likely to consider walking away when several of their friends and neighbors have already been foreclosed on, especially when continuing to make mortgage payments is such a raw deal.
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