Walk away, walk away, banks will crumble:
Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.
If you own a property that is underwater, it is financially insane for you to continue paying the mortgage if it is less expensive to rent a similar place. There is no “moral” aspect to the situation since the contract clearly delineates the limits of your responsibility. So long as you give up the property, you have abided by the contractual terms specified as part of the deal. While it’s very important to confirm that you have no more liability than the loss of the property before taking such an action – the debtor’s liability varies on a state-by-state basis – that’s the only decisive factor.
As for fears of how a mortgage default will impact your credit score, were you not paying attention for how the banks have behaved over the last ten years? During the expansion phase, banks will loan to anyone who will take their money and during the contraction phase they’re not going to loan to anyone who would find themselves underwater, so in practical terms it’s a non-issue. Keep in mind that 90% of the 4.5 million homeowners who are more than 25% underwater haven’t defaulted yet. But most of them will, and the impact of that wave of defaults is not going to improve your home equity position.