Walking Away from an "Underwater" Mortgage?

Few financial advisers would recommend it, but more and more Americans are walking away from “underwater” mortgages. Hey, if the money’s not there and the late mortgage payments are stacking up, leaving the keys in the mailbox and backing up the moving truck might seem like a way out. But if you do so, know the ramifications — because they stack up, too.

It’s become increasingly apparent that walking away from a mortgage — known in the credit industry as “strategically” defaulting — is becoming more common. A recent report from credit scoring giant Experian, in partnership with Oliver Wyman (a consulting company), concludes that about 18% of all “troubled” mortgages resulted in mortgage owners taking a hike. Experian bases its estimates on homeowners who were at least 60 days late on their mortgage payments.

The Experian study also points out that many “walkaways” are mortgage-holders with high credit scores. Invariably, they live in states like California where mortgage lenders have no recourse to go after a homeowner who walks away from a mortgage.

Then there’s a white paper written by a University of Arizona Law School professor, which states that leaving a troubled mortgage situation should not only be tolerated, but encouraged. In “Underwater and Not Walking Away: Shame, Fear and Social Management of the Housing Crisis” professor Brent T. White says that the social and economic repercussions of walking away from an underwater mortgage aren’t nearly as bad as you might think.

What are those repercussions? For starters, your credit score would take a major hit — in the short term. Dropping your credit score more than 100 points would most likely eliminate you from consideration for any kind of credit — even a gas station credit card — for a few years.

But after a while, some mortgage lenders are willing to give you another chance. The Federal Housing Administration (FHA) says it will revisit a mortgage loan for a walkaway after only two years. Even private lenders, like banks and credit unions, will lend to you after five years.