"Third, walking away from a home and mortgage almost always negatively affects your credit rating and decreases your value as a renter to a prospective landlord. "

Renting? They are walking away and moving in with parents, siblings, kids, etc. They can't afford rent. They've lost their jobs, or hours have been cut. You talk about it as if foreclosure is an investment decision. For many it is a survival decision . . . they don't have a choice.

The best insurance against more foreclosures is creating jobs. Obama says he'll try to create 2.5 million new jobs, and I believe that is the correct approach. If people can pay the mortgage they'll stay in their homes for the reasons you mention (disclocation, cost of moving, keeping kids in their schools, maintaining a good credit rating, etc.)

Your perspective is informative. I have wondered how the financial industry could possibly overlook the housing bubble and not foresee that the collapse of a housing bubble would result in foreclosure. You are making assumptions about the costs of staying in an underwater mortgage versus renting that are just not consistent with reality. What you assume MAY have been true at one time but is no longer operative in today's market.

Start by comparing the monthly cost of making mortgage payments at the current rate to the monthly cost of renting. Consider that people who make $50K per year are paying less than the top income tax rate so their tax savings due to mortgage is much less. Also consider that deducting the total interest may put them into AMT territory. This is a less good incentive than you might imagine. After you go through a budget, it becomes painfully obvious that the best economic move is to walk away.

When people wake up to the fact that the banks are nothing more than loan sharks that have screwed them royally, why would they feel the need to hold up their end of a really bad deal? Loan sharks keep poor people hooked by threats of personal violence. Professional loan sharks (which is what Big US finance has become) cannot threaten bodily harm so there is no reason for borrowers to NOT stiff them. Walking away from bad deals is nothing more than economic self-interest and economists should not try to deny it and should NOT have assumed otherwise.

Let's say you bought a modest $600,000 house at the peak in San Francisco (May 2006 per Case-Shiller) with 5% down. With a 5% 30-year loan you've paid off nearly $20,000 principal, so you owe $550,000. If your house followed the Case-Shiller repeat-sales index precisely, its value was $416,000 as of August. Since home loans are non-recourse, the market currently is offering you $134,000 to walk away.

Now, I hate moving, but $134,000 seems like an awful lot of motivation to bite the bullet and move. The loss of the interest deduction doesn't impress when I can rent for less than the after-tax cost of my mortgage, and despite the correction in the housing market, I still can. Your analysis will start to gain traction only when the market has corrected enough that the subsidized cost of owning is comparable to the unsubsidized cost of renting. In many parts of the country that may now hold true again, but not where I live.

As for insuring against foreclosure, the best policy to me seems to prevent property bubbles. Replacing the mortgage interest deduction with a credit, or scrapping that subsidy entirely, seems like a good first step. Subsidies like that one just act as price supports, and we're seeing now what happens when residential housing prices get ahead of fundamentals.

how much you are underwater, how soon you expect prices to recover, how pressed you are and whether you can still afford it. The optimal course may be to hold on until prices reach bottom and then transfer to a different area buying at the low and forcing the lender into a short sale. Unemployment would work as well, but you would have to rent for a while to find work and rebuild your credit.

Here is the price to rent ration (Case Shiller) link. This is why the assumption that it makes no sense to default on a mortgage is very wrong. Once housing price bottoms, that may be true. However the assumption does not hold at bubble prices.

Apparently, the financial institutions that wrote CDOs based on mortgages did not understand that we had a housing bubble. The Bush administration functionaries missed it as well. Obviously, they did not have the correct expertise to advise them.

http://4.bp.blogspot.com/_pMscxxELHEg/SSwHe3pC5eI/AAAAAAAAD2k/RQ9FZZsafJ...

In the end, Martin Feldstein is a sright-winger. He believes strongly in things which redistribute wealth upwards, and opposes downward redistribution. That's what he's worried about, that people will start acting like cold-hearted corporations,and terminate disadvantageous (sp?) financial arrangements. It's O.K. when corporations decide that long-term employees are a net negative, or that a pension fund is just sitting there, but Market forbid that ordinary peons should act like that!

It's always helpful to get other peoples opinions about mortgages and how they are doing.

I live in Cape Coral FL. The condo that I purchased for $250K (with %15 down, btw)is now worth about $160K and still dropping. Unemployment in this part of FL is at 9.6% and rising. Houses that sold for $190K 2 years ago are now selling in the $60-70K range, and more are becoming available every day. For someone like myself, that is almost 50, walking away is the most viable option. The banks won't even talk to me unless you I am already 3 months behind (by which time my stellar credit is shot anyway.) The banks will not allow me to short sale, much less consider any debt forgiveness. I have tried to work with them, but they won't budge. So screw them. They can auction it for $90K and eat the rest. There are so many properties for rent here that I can get a place twice the size at half the cost, not worry about the expensive insurance,repairs bills, condo fees etc. As far as the blot on my credit, I'll just be part of the growing herd.

It all depends if you need a submarine to get around in your house. If you are under 100K + then, you have to calculate how long it will take the market to bring your house up to what you owe.

For the next 2 years, the housing prices will either go down or level off. After that it will start to come back, however the growth rate of your investment, will be anemic and even if it goes up at 8% per year it will take 8 - 10 years to reach your current loan amount.

I am sorry, but you have to really think about taking a hit for 10 years out or your short life.

The big banking institutions want you to take the hit for the ten years, so that they don't loose a penny.

Additionally, a home is not just a home, but a valuable investment. If you don't think so then just rent for your whole life. When you get older and are not able to work, then lets see where you get the money from.

You stipulate that only speculators have an incentive to walk away from a significantly underwater mortgage, but your logic is old, tired and flawed.

Bought my house straight out of college in 2006. 15% down on a 304k loan. Also have already dumped 50k into upgrades and additions.

Since I was fresh out of college, I had no credit history, so the only option was an arm. Which has now reset to 11.5%. Had the home appraised last week. The appraisal came in at 168k.

My arm increases cap out at 14%.

The mortgage companies that sold me this loan 'guaranteed' that they would refinance me into a fixed rate loan before the first arm reset, by then they pointed out, I would have a credit history and my home value would increase.

By the time I had the credit rating to be able to refi, my home had lost all it's equity, and the mortgage company wouldn't refi me.

I keep throwing more money into this mortgage and every 6 months my rate increases.

The banks want to take advantage of circumstance because its in the best interest of their bottom line. Instead of modding the terms of my loan rate down to something fair. All the while they are collecting $$$ from uncle sams tarp fund.

Are you really arrogant enough to not see just how much sense it would make for me or someone in my situation to cut their losses and walk?

today Obama announced his mortgage relief plan, which again doesn't help ppl in my situation because:

1) My mortgage is greater than 105% of my homes value
2) My loan isn't owned by fannie or freddie

Damn straight I am gonna walk. I was holding out, "hoping for change", but apparantly hope doesn't float and obamas plan does nothing to help me.

Why should my son suffer because I got suckered my a crooked mortgage broker and originator?

Many of these loans were totally predatory, or did you forget about the ameriquest settlement already?

I was young and naïve, but I'm not going to continue being exploited.

Ameriquest, citi, town and country, argent, deutsche bank and mortgage it all new that they were taking advantage of ppl.

They may not have been taking advantage of everyone, but there must certainly be many in my similar situation.

I have no shame in walking away, they've already made plenty off me just from interest the last 3 years.

Screw them, everyone that has the perogative to walk should.

That will send a message, loud and clear.

My wife and I sold our home in Atlanta in August 2007 and moved to Palm Beach County - where we now rent a home, owned by the developer but never sold. It is in a complex of 90 homes, 50 stand alone 2300-2400 sq foot homes, and 40 town homes (around 2200 sq ft.). Built during 2006 when it became apparent that the market had peaked, the single family homes were initially sold for between $650k and $745k, and the 47 (of 90) that sold were mostly closed in February 2007. Almost nothing sold after April of 2007, and the developer resorted to leasing the remaining units. One has gone into foreclosure and was knocked back to the bank (a $650k mortgaged unit was foreclosed and the house briefly appeared on the market, post foreclosure at an asking price of $437k.) It was taken off the market after several months of no activity and leased.

Another home in the community was purchased for $700k in February 2007 by an AZ investor. The current tenant in that house is moving out soon, and told me recently that the owner was desperate to sell and had been given authorization to short sell it for as little as $310k. I looked up the records and saw that the home has a $570k first, a $70k second and the owner put $60k down. All so it could be sold for $310k. We are in the twilight zone here.

First off, a 22-year, with no credit history, straight out of college, should not be taking out a 300K loan to put toward a risky investment.

I didn't buy a home until I was almost 30 years old, because I needed time to build a credit history and save for the down payment. But you say you had 15% down (45K), which is unusual for a new college grad, so I'm guessing you are industrious and saved that money during college,
or else you have a wealthy family to backstop you (and that may be one reason why the bank was willing to make the loan). If you had a job and high enough income during college years to save 45K you should have had a good credit rating, and should have qualified for the better loan terms. I'm guessing you and your sponsor (mom and dad) decided that getting you into the real estate game was a good idea. Now everybody is torqued because the "sure thing" (escalating real estate values) turned out to be a bubble.

So you gambled with your money and lost, just like playing the stock market or the Vegas casinos. There is nothing special about real estate . . . it's an investment, and past performance does not guarantee future results. Hey, nobody is bailing me out for the money I lost in my 401K, even though it was touted as a "good deal".

You and your sponsors made a bad investment decision. Get over it and move on. If that means walking away and doing the foreclosure thing, do it.

Most college grads don't take out massive loans on bad terms. I didn't do it because I was smart enough to see it for the scam it was, even back then. Which college did you go to that doesn't teach common sense?

My mom and dad were killed in an auto-accident when I was 13.

By 14 I asserted that I could probably take better care of myself than the state run group homes were and bailed out of that situation, worked 3 jobs through high school and got my own apartment with some college kids.

I actually had 37k saved up after college, from working construction jobs durring the summer breaks and saving every penny earned from them.

I'm not sure if anyone has mentioned this to you, but the cra's don't take your income into account.

Sounds to me like you're a snotty, presumptious elitist that just can't stand to be wrong on anything.

Many of these loans were completely predatory, not just towards the homeowners, but also to the investors as well.

I was dealt a crappy hand in life early on and I learned quickly not to sit around bitching about it or feeling sorry for myself.

I trusted a mortgage broker, and that was my fault. But I will not sit around pouring bad money after good, at my families financial expense, just for the sake of citigroups bottom line.

They can have the house, I'll cut my losses before they are insurmountable.

It's wonderful that you ran away from state care and were so brilliant and got the full merit scholarship. Congratulations.

You should have received SS survivor benefits, and if you didn't you were passing up a benefit that your parents, to some degree, paid into.

If you make 200K a year then you don't need to worry about foreclosure . . . by now you shouldn't have a problem with converting to a better rate on a $260K loan (you said you paid 300K with 45K down). A 200K annual income should qualify you for a good rate . . . your payments aren't a large percentage of your income if you are making a verifiable 200K annual income.

Good luck with foreclosure/refinancing or whatever you decide to do.

Yes, I'm frigid. I live in Minnesota, and it's cold ;-)

If you have $120K equity in the home, make $200K annual income then you should be able to refinance. If that is $120K equity against the original purchase price (300K) then you are at $180K to pay it off. $180K debt against a 200K annual income is nothing.

That's what makes this so unbelievable . . . your lender should be willing to deal . . . unless there is more to this story (auto loans, high credit card debt?) or you are an independent businessman with unverifiable income.

If you have an excellent credit score you could find a new lender (don't work with the people who refuse to mod your loan), get new terms and close out the existing loan.