The recent topic I find trending up (my own observation, not from any particular tracking site) is that of walking away from your mortgage, otherwise known as “giving the bank the keys.”
I’ve been reading about moral hazard and the risk of further collapse in home prices should people continue to default, but it was only when I ran into articles such as Motley Fool’s Why Are Homeowners Idiots? did I realize that there are a number of financial writers not just observing this phenomenon, but advocating it.
In a New York Times article, Walk Away From Your Mortgage! Roger Lowenstein compares a homeowner to a business which routinely chooses which ventures to keep funding and which to let fail. The reason we’re are not seeing more homeowners simply walk away is that defaults are considered antisocial and even amoral. It’s this appeal to morality that has our president urging homeowners to follow the “responsible” course.
Professor Brent White from the University of Arizona is frequently quoted as suggesting that not walking away from a house that’s underwater (i.e. worth less the mortgage) goes against one’s economic self interest and perhaps shame and guilt keep them from doing so. Even our government has made the process easier. Until recently, forgiven debt was considered taxable income. The bank sells your home and comes up $200K short, it’s as if you got that much extra income that year and a hefty tax bill follows. This is no longer the case as debt forgiven on one’s primary home is no longer taxed.
As with many issues, I don’t find this one to be so black and white. I can use some more time to ponder this issue before deciding, it’s not as though I have a default planned. I’m within about 7 years of being done with our mortgage.