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Walking Away From Your Mortgage Is Morally Wrong And Financially Stupid, Says McArdle

Posted Jan 20, 2010 04:47pm EST by Henry Blodget in Recession, Housing
Related: xhb, len, kbh, ms, bac, wfc, c

As millions of Americans begin to realize that it will be years if not decades before their houses are worth what they owe on them, there has been lots of talk about whether it's okay to just voluntarily walk away from your mortgage.

I argued last week that, in some circumstances, it is okay -- because your mortgage is a business contract between you and a bank.  As the contract makes clear, if you stop paying, the bank gets the house, and you lose your equity and credit rating.  That seems like a fair trade, especially if you have tried to renegotiate the mortgage first.

Our guest Megan McArdle, economics editor for The Atlantic, thinks this argument is wrong.  First, Megan says, walking away from your mortgage voluntarily is often financially stupid: There are plenty of fees and costs associated with defaulting, and your credit rating will be destroyed for years.

Second, Megan says, it is morally wrong to walk away, because your mortgage represented "a promise to pay."  If everyone entered into a mortgage with a secret plan to walk away if the house value falls, Congress would write new laws allowing mortgage-lenders to go after borrowers' other assets (which already exist in some states).  This would make borrowing money harder and more expensive for everyone.

Megan concludes that people who walk away are "jerks".  In the accompanying video, she makes her case.

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