Strategic Mortgage Default: The Irresponsible, Amoral, But Best Strategy?

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If you voluntarily walk away your mortgage because you owe more than the home is worth, are you a bad person? Should you even care?

If you’re underwater on your mortgage, one option is to keep up with the payments. You continue to swim and swim, struggling to get to the surface—which is a lot further away than you’d anticipated when you bought the house. The other option is to simply stop making mortgage payments. Rather than struggle to stay afloat, you could just pull the plug and let the water run out of the pool. The water—or mortgage, in this increasingly tiresome metaphor—is gone, so you no longer have to worry about that. Then again, you don’t have a pool anymore to play in—because you no longer own your home.

Involuntary mortgage default is sad. But a carefully calculated, voluntarily mortgage default? That’s something else. It’s become a phenomena in the U.S. of late, both before and after a University of Arizona law professor plainly recommended that homeowners stop paying underwater mortgages. To do otherwise, the thinking goes, is stupid. It’s bad strategy. Why pay more for something (or continue to pay more for something) than it is worth?

Roger Lowenstein, in the NY Times Magazine, explores the topic of strategic mortgage default, digging especially into the moral complications. Big businesses routinely stop paying mortgages when they owe more than the property is worth. But the little guy is held to a higher social and moral standard:

… the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.”

But there is always some amount of speculation when you buy a home. Few people buy without thinking of the resale value, and of the purchase as something of a business decision. Sure, you like the front porch and the paint color in the dining room, but a home is very much so an investment. In any event, does Paulson’s comment mean it’s OK to default if your intention was to flip the home, but not if you’d planned on living there for a while? That seems like a silly distinction. The average homeowner is allowed to take a cold business approach as much as anyone is.

What about the responsibility one takes on when agreeing to a mortgage? From Lowenstein:

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

So you’re not really breaking the contract. The contract remains valid, and the stipulation for nonpayment follows through according to contract.

Lowenstein finally throws blame for the situation—in which, for example, 65% of private residences with mortgages in Nevada are underwater—onto the lenders themselves:

If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

If you owe a ton more than what your home is worth, the only real holdups to walking away from your mortgage are your sense of obligation, your fear of getting a bad credit score, and your personal attachment to the home. If you’re not that in love with the house (there are others), and you can live with bad credit (many people can and do), it basically comes down to responsibility—and often, the shame and guilt you’d feel if you shirked that responsibility. Generally speaking, shame and guilt don’t enter the equation when it comes to smart business strategy. So should they factor in to your decision to pay the mortgage or not?

Read more:
Homeownership: More Nightmare Than Dream?
You Just Strategically Defaulted on Your Mortgage. What’s Next? ‘We’re Going to Disneyland’