Can’t Make the Mortgage Payment? Just Walk Away?

More and more borrowers are watching their house values sink while the cost of their loans skyrockets.  What to do?  It appears that some are opting to skip out on the mortgage all together.

Homeowners are abandoning their homes and, more importantly, their mortgages, rather than trying to keep up with rising payments on deteriorating assets.  So many people are handing their keys back to lenders that a new term has been coined for it:  "Jingle Mail."

Current lending practices have created an environment where a measure as extreme as abandoning a home actually makes sense to some people.

Many home buyers put little or no money down, so they don’t have much invested in them.  This leaves them with little incentive to keep making payments when a home’s market value dips below the balance of the mortgage.

The most serious consequence is a tremendous hit to credit scores.  But for some, that’s better than throwing away money they’ll never recover by selling their home.

Credit scores are hurt much more by missing multiple payments – on credit cards, cars and so on – than by a single foreclosure.

According to Craig Watts, a spokesman for the credit reporting firm Fair Isaac, "The time it takes to regain your credit score [after foreclosure] can be shorter than after bankruptcy."

Lenders are afraid that borrowers may find it’s worth the hit to their credit scores, if they can drastically reduce their housing expenses.  Someone with good credit and a $600,000 home in a town with sinking real estate prices could buy a similar house nearby for $400,000, and then let the other $600,000 mortgage go into foreclosure.

Now, skipping out on a home is easier, thanks to the Mortgage Debt Relief Act of 2007.  Previously, if a bank sold a foreclosed home for less than the mortgage balance and it forgave the difference, the borrower had to pay tax on that difference as if it were income.  Now the IRS will ignore it.

Here’s a brief CBS News 60 Minutes clip that shows this is really happening (Clip only runs 1:10)

Leave us your comments on this article and the video below… we’d love to hear your thoughts on this topic.