ORLANDO, Fla. — Lynn
Thompson quit paying the mortgage on her investment property — not because she
couldn’t afford the payments, but because she thinks walking away is better for
her long-term financial health.
Thompson bought the property
here for $175,000 in January 2007, just as the housing market began its slow
downward slide. At the time, she planned to rent the house and eventually sell
it for a profit.
Today, she estimates the
house is worth $85,000, maybe less.
Unable to find renters to
help cover the mortgage, she tried to convince her lender to allow a “short
sale” — selling below the loan amount, with the lender forgiving the balance.
When the lender declined, Thompson decided to walk away.
“I would have basically no
money left every month if I made the payments,” said Thompson, a single
39-year-old pharmacist. “If I tried to sell the house in, say, 10 years from
now, I still would have to come up probably with, say, $75,000.”
Desperate homeowners like
Thompson have raised an ethical debate: Is it ever OK to walk away?
Nationwide, up to 25 million
homeowners — about one in four – are “underwater”: like Thompson, their
mortgages are worth more than their homes. Those who do walk away face an array
of financial consequences, from damaged credit to the prospect of a lender
suing to recover the balance. Yet for many, the question fundamentally is a
moral one. Is it the right thing to do?
It’s unclear how many
homeowners, like Thompson, are opting for strategic defaults — allowing their
homes to go into foreclosure even when they can make the payments. Many feel
their homes are decades away from regaining value and they see no other
But especially in hard-hit
places such as greater Orlando, where 55 percent of homeowners are underwater,
the question is nagging at more homeowners, and the number of strategic
defaults appears to be rising.
Strategic defaults accounted
for 31 percent of all defaults in March, up from 22 percent the year before,
according to an April report by Paola Sapienza of Northwestern University and
Luigi Zingales of the University of Chicago.
That doesn’t mean, however,
that homeowners are walking away without feeling like they violated some
ethical or moral code about not buying something they can’t afford. Some are
left with a deep sense of debtor’s shame.
Brent White, a law professor
at the University of Arizona whose writings include The Morality of Strategic
Default, said more than 80 percent of homeowners still think defaulting on a
mortgage is immoral, and those who do it usually make the decision not for
financial reasons but emotional ones, he said.
In other words, it takes
more than a dismal financial reality to push homeowners to default. Often
underwater homeowners feel angry, depressed or hopeless, he said.
“People walk away because
they’re angry at their lenders,” he said.
“They have been unable to
work with them, and the government hasn’t done anything to help underwater
homeowners who are trying to make their mortgage payments. If people were
acting purely on a rational basis, they would walk away much sooner than they
At the heart of the question
are biblical concepts of promise-keeping and neighborliness, said James Childs,
theologian and ethicist at Trinity Lutheran Seminary in Columbus, Ohio, who
noted that one neighbor’s default can sink another neighbor’s property values.
“The simple answer is we
make certain promises when we move into a neighborhood that we’re going to be
good neighbors,” said Childs, author of Greed: Economics and Ethics in
“If my greed … is realized
at the expense of my neighbors and I say I’m free to do that, then I’ve missed
an ethical point entirely.”
Yet in an economy that rose
and fell on the backs of unaffordable mortgages, homeowners aren’t the only
ones to blame, ethicists say.
White, from the University
of Arizona, believes the housing market and economy could recover more quickly
if homeowners could rid themselves of negative equity, allowing housing prices
to hit bottom faster. The longer homeowners remain underwater, the longer they
feel poor and spend less money. What’s more, a job loss or medical illness could
be even more devastating.
For now, Mike Booth will
remain in his home. He and his wife bought their first home in 2008, two years
after they married, for $205,000 — a bargain since the house was appraised at
Today, he estimates the house
would sell for $165,000, but the 30-year-old engineer is taking the long view
on what he and his wife call “our little castle.”
“We’ve entered into a
binding moral contract,” said Booth, who lives in suburban Orlando. “… Really
we don’t think about it being underwater. It’s kind of like being in a
long-term investment, and tracking it daily doesn’t make sense.”