Guilt if you strategically default

Would you be feeling guilt if you strategiclly default or walk away?

You are not alone, more than 1 million homeowners have to stop making mortgage payments and let their homes go into foreclosure. Are these people who couldn’t afford to pay? As this trend grows, Americans struggle with whether this is a smart financial move or a moral failure you can think of it as a finacial pit.

Should you feel guilty if you walk away?

Michelle Burton is ready to trade up. After more than five years of living in a Long Beach, Calif., neighborhood that she thinks is unsafe for her and her two sons, she has stopped making her mortgage payments, started banking the money and is waiting until just before eviction to move.

“I don’t want to stay in the area I’m in,” says the 33-year-old nonprofit development director and single mother. “I could be renting a much better house in a better area for less or equal to what I’m paying now.”

Walking away from a large mortgage payment and renting used to be a last resort for homeowners who were seriously ill or unemployed.

These days, with so many of the nation’s homeowners underwater on their loans, that last resort is a more routine economic decision for even the most gainfully employed. This trend is sparking outrage, neighborhood upheaval and calls for government lending reform.

Walk away, live it up?

For better or worse, the stigma associated with foreclosure is fading: As many as 1 million people are estimated to have strategically defaulted on their houses last year, according to credit firm Experian and consulting firm Oliver Wyman. That’s more than four times 2007′s level and 70% more than the 588,000 in 2008.

That’s due in large part to the sheer numbers of foreclosures, but the percentage of strategic defaults is also on the rise, say the study’s authors.

“We’ve seen a marked increase in this kind of behavior,” says Charles Chung, Experian senior vice president.

A study by Luigi Guiso, Paola Sapienza and Luigi Zingales published last July found that 81% of homeowners surveyed believe that defaulting on a mortgage is “immoral.” But those who know someone who defaulted are 82% more likely to declare their intention to do so as well. The willingness to default increases with the proportion of foreclosures in the same ZIP code, becoming a sort of “contagion” that reduces the social stigma.

The payoffs for those who default can be significant. With a depressed rental market, many are going on to lease houses in their same neighborhood – or a better one — for hundreds less than they were paying on their mortgage.

Economists and real-estate analysts are calling this phenomenon a “stealth stimulus” that is putting more cash in some people’s pockets for iPods, netbooks, beach vacations, concerts and dinners out.

“You have a lot of people saddled with mortgages they can’t afford,” says Christopher Thornberg, of Beacon Economics, a consulting firm specializing in real estate and the California economy.  “Deleveraging is part of the process of getting back to a healthy economy. If you’re not making your mortgage payments, what else can you do with that money?”

And, of course, not having to pay your mortgage payment for the better part of a year (or until your bank moves to evict) frees up a lot more cash for daily living.

Louis Tondu, a client of You Walk Away in Richmond, Calif., stopped making his mortgage payments last June, but says he was advised he should be able to live in his house until about May, as the bank has yet to file a notice of sale.

“They should have been able to take possession Dec. 21, but nothing has been filed yet. I’m not sure if the bank is backlogged or what.”

Tondu, an airline mechanic who has been living off his disability settlement and working in auto shops sporadically, spent four months last year in the south of France, visiting his girlfriend and trying to find work. He could not have done that, he says, if he was using his limited funds paying his $2,000 a month mortgage.

A bitter pill

Hearing stories about your neighbors’ upgraded lifestyle while they are not making mortgage payments or are paying less in rent can be hard to take, says Taylor Gang, a certified financial planner in South Florida, an area hard-hit by foreclosures.

“It makes you feel stupid for following the rules,” he says.

Ditto for tenants of foreclosed landlords who took rent payments, even as they didn’t pay their mortgage each month.

One real-estate message board respondent, “PMSoldier,” writes bitterly about relocating to Washington from Kansas and renting a house from a Mercedes-Benz-driving investment property owner who lived in a lakefront community.

After “PMSoldier” found something for his family to buy months later and asked her about breaking the lease, he was told that there would be none: The house was being put up for sale. The landlord had stopped paying her mortgage two months before he signed a lease, and it was now being put up for auction.

“A lot of the moral condemnation is driven by people’s own self-interest,” says Brent T. White, an associate professor of law at the University of Arizona who put out a controversial paper last year that questioned why more of the nation’s 10 million to 15 million underwater homeowners aren’t strategically defaulting.