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Faced with an underwater mortgage: the moral choice to pay

An underwater mortgage -- or owing more than a house is worth -- is still a debt obligation. If too many people walk away and default, even if they can make payments, America will face a moral crisis.

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To walk, or not to walk? 

That is the question for nearly a quarter of US homeowners who can still make their mortgage payments but are “underwater,” or living in a house worth less than the amount they owe on the mortgage. 

Should such homeowners with “negative equity” simply pack up and leave, mailing the house keys to their lender in a desperate act known as “jingle mail”? 

Or should they honor the “promise to pay” in their loan contract and keep up with monthly payments, hoping for steady growth in home prices?

Unfortunately for the economy and future home buyers, too many mortgage-holders are walking away, especially in markets where prices have dropped 30 to 50 percent, such as in Nevada, Florida, and Arizona. An estimated 1 in 10 people with underwater mortgages have made this choice, despite the stigma of being a shirker on a debt obligation.

Call it what you will – a “strategic default” or simply cutting one’s losses in a business decision – this trend to walk away is creating an erosion of trustworthiness, and not just for the financial industry. It is a creeping moral crisis that needs a solution soon. 

Yes, under certain circumstances and in those states where lenders have limited rights to go after a walk-away’s assets, a default can make sense – in an amoral calculation of personal finances. A buyer took a risk by assuming a rise in home prices and failed, similar to a failed business or a speculator in commodities.

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