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Can You Really Just Walk Away?

Dan Caplinger
February 15, 2008

As housing prices fell over the past year, more and more homeowners are in the uncomfortable position of owing more than their homes are worth -- in some cases, far more. Being underwater on their mortgages has led many to ask a simple question: Wouldn't it make more sense to let the bank foreclose than to try to find money to make payments every month?

A growing number of people are answering yes. You can find many reports of homeowners sending their keys back to their mortgage lenders when they can't -- or don't want to -- keep up the payments. Others continue to live in their homes without paying their mortgage, challenging their lenders to take action.

A no-win situation
For desperate homeowners, giving up on your mortgage might seem to be the lesser of two evils. Defaulting on your mortgage shatters your credit rating -- but so does spending every penny you have to save your house if it means being late or defaulting on other debt, such as credit cards or utility bills.

Predictably, lenders are not happy about this trend. Both Wachovia (NYSE: WB  ) and Bank of America (NYSE: BAC  ) mentioned the growing problem in recent conference calls, noting the reversal in the mind-set of borrowers. Homeowners used to pay their mortgages first and sacrifice other obligations to make payments. But now lenders see borrowers with otherwise good credit decide to stop paying their mortgages. And the costs of foreclosure -- especially in a down market where lenders are unlikely to recover 100% of their loan amount -- make it a last resort.

In addition, homeowners have a clear political advantage, at least for now. The recently agreed-to foreclosure moratorium has several banks, including Citigroup (NYSE: C  ) ,