The (Dead)Beat Generation

Should you walk away from your mortgage just because your home depreciated?

So you refinanced. Or bought too much house. You divided the mortgage payments by your income, and decided you could swing something a few percentage points higher than the recommended 25—33 because the market was rising and your house would make you rich just by existing.

You relied on speculation as an investment strategy (not even your own speculation, but other peoples’.) But your house got cheaper, maybe cheaper than what you bought it for. That’s called “losing money on an investment,” which happens all the time, but people think it oughtn’t when your bedroom and kitchen are inside the investment.

The market might bounce back. If you’re 7 years in, lots can happen in the remaining 23 on a 30-year mortgage.

When you lose money on a stock, your (invisible) bank account gets wiped out. Owe more than your vehicle is worth, and it might get repoed. But stop making payments on a house, and there’s a letter from the constable on the door, maybe some yellow tape involved — hard to keep that quiet from the neighbors. Also, people getting forcibly removed from “their” house (it’s yours and not the bank’s only after you pay the entire mortgage) make for striking photo and political opportunities. After all, bankers are evil. Meanwhile, it’s the working stiffs just trying to make ends meet who get raked over the coals. (Wow, a sentence composed entirely of idioms. Mike Lupica approves.)

Some people who make enough to cover the mortgage dump the house anyway — the strategic default. They assume investment values only move in one direction. According to Experian, that includes 20% of defaulters.

This is hiding behind the law. Stop making payments, and it’s not like you’ll be evicted that week. It takes months, even years. The idea here is to take the mortgage payments and put them toward, say, your credit card balance, figuring the lender will gladly renegotiate a contract you signed in order to get some sort of return on its investment.

Some borrowers think this is fine because if the lender kicks you out, it’ll be tough for them to sell the house to someone else in a down market anyway. The lender at least wants the house to stay lived in.

This is nonsense. Strategic defaults hurt everyone.

A strategic default does to your credit score what O.J. did to Nicole. You’ll never be able to borrow either a) again, or b) until Congress and the White House decide that so many people need to improve their credit score that it just wouldn’t be nice to let something as insidious as that have such power over their lives.

What’s the solution? Well, no politician of either party wants the other accusing them of standing by while old ladies and cripples are being kicked out of “their” houses. The government would then essentially renegotiate mortgage contracts, setting caps on future ones and insisting the lenders take less. Under this type of forced renegotiation, the borrowers don’t even have to sack up and face the lenders themselves.

Besides, neighbors, professors, and the blonde lady on TV say defaulting is fine. And for PR reasons, lenders are hunting down deficient borrowers about as aggressively as the federal government goes after illegal immigrants.

Say you walk away from your mortgage, mail your keys to your lender (this is how it’s done), then rent somewhere. Your (old) neighbor follows, then a third. No matter how swank a neighborhood you deserted, the lawns turn brown and the pools green because no one’s living in the houses. Which reduces the value of the remaining houses. Now the people who stayed behind and haven’t (yet) defaulted watch their homes’ values decline. Which means they’ll likely owe more than their houses are worth, making it more likely that those folks will default. Continue like this, and you end up with…Detroit.

When you declare bankruptcy, you can renegotiate to protect yourself from creditors. But strategically defaulting is the opposite — you keep all your assets except the house and mortgage.

So what to do? Four choices:

1. Man up, economize and make your payments. You’re obligated to the lender, yourself (to preserve your credit), any kids of yours (unless you don’t think you need to set an example) and society. If you steal from your lender, it doesn’t directly affect the rest of us, but it makes civilization incrementally more difficult to live in–the broken window theory.

You don’t like that answer? It’s a house, for crying out loud. You need somewhere to live. No matter how much value it loses, it’s still better than renting and never building a dime of equity. Stop assuming that because your $100,000 house lost 10% of its value last year, it’ll lose a similar amount next year and by 2021 will be worth -$10,000.

2. Short sale. If you know you can’t make your payments, and you’ve exhausted every possible way of earning or otherwise securing money, call the lender and come clean AS SOON AS POSSIBLE. They’ll sell the house at a loss, just to get you out of there and collect their money. You’ll still be on the hook until the bank resells the house, but that won’t last forever and at least you can stop throwing good money after bad.

3. Ask for a loan modification. It’s begging, but your pride already left a while ago.

4. The Deed in Lieu of Foreclosure. Tell the lender, “Look, I can’t make the payments. Let’s not short sell, I’ll just give you the damn thing to get out of this debt.” This hurts your credit rating the least, and tells the lender not to worry about you being one of those evictees who pours concrete in the toilets and makes off with the copper wire.

And next time, get a vanilla 30-year fixed-rate mortgage.

About the Author

Greg McFarlane lives in Las Vegas, winters in Maui, travels the globe and hates working for other people. He recently wrote Control Your Cash: Making Money Make Sense, a financial primer for people in their 20s and 30s who know nothing about money. You can buy the book here and reach Greg at


  1. 3

    DG says

    It will probably take 20 years in some of the worst hit areas to see prices of 2006. I didn’t lose $10,000 on a $100,000 house I lost $250,000 on a $400,000. All because the banks were appraising houses at values that were insane and giving no money down loans to anyone with a pulse(including me). I decided to beat the system. I stopped paying 01/01/2009. I’m still in the house and I actually really wish they would foreclose it. In the meantime I saved up every penny and bought a small modular for $60,000 last month. I will now save money again until I can buy another nice place for cash in 5-6 years. I never plan to borrow money again for anything, but I seriously doubt in 7 years when the foreclosure drops off my record and my credit is back at 800 bank won’t be dying to loan me money again.

  2. 4


    At the end of the day, whether homeowners are “ethical” or “not”, whether one deliberately walks away or is foreclosed, the fact is that housing prices have to fall some more!

    And this whole episode also highlights the fact that banks have not really marked down the “true value” of their mortgage portfolio otherwise based on “mark to market”, they will all be insolvent today! And BTW FNMA is also insolvent!!!

    That is what happens when you buy something that is overvalued and your cash flow runs out. And that is what we will face because everyone is in the same boat.

    • 5


      @Adam: Thanks for sharing that story. Sadly, I know a few people in your friend’s situation as well. Walking away when you’ve lost job and no longer have the ability to pay doesn’t qualify as a strategic default. That is just a default, which is a completely different situation, of course. (And I will get the subscribe to comments plug-in! It’s on my to-do list!)

      @Mr. CC: Greece is in the same boat, although they are still in the denial phase. Their civil servants are currently getting 14 months pay of 12 months work and can retire at age 54 with full pensions. Ludicrous. I talked about this in my Black Coffee column (edition #36) last week. (But we digress…)

      @2Cents: I love it! It looks like we need to emulate Canada’s policies! I’m afraid it may be too late though.

      @Jeremy: Great points, my man! I too feel the repercussions should be severe for this reason: If everybody decided to act that way (strategically default on loans) it would completely destroy the market for affordable home loans. Why would anybody want to get into the lending market when everybody can strategically default with impunity?

      @Sam: I’m pretty sure your tongue was planted firmly in thy cheek, yes?

      @Kevin: To be clear, I think it is safe to say both you and I, as well as Greg, have our beef with strategic defaults where people walk away simply because they can’t stand the thought of owing more on their house than it is currently worth (even though they can make the payments with no financial distress). And while I am sympathetic to the plight of those who end up being forced into foreclosure because of lost income due to job loss or catastrophic medical condition, I don’t buy into the idea that we can use the system as a scape goat. In the same way that I blame the cocaine addict (not the drug dealer) for being stupid enough to snort the initial lines that led to their addicted state, I still hold the individuals who took loans out that they couldn’t afford ultimately responsible for the end state (foreclosure). Yes the banks acted as “the drug dealers” enabling borrowers of questionable means to get the loans in the first place – but in my opinion the borrowers have to bear the ultimate responsibility here.

      @DG: I would normally agree about the length of time it will take to get back to 2006 prices – 15 to 20 years seems reasonable to me for this go around. The last housing bust in So. Cal in the 1990s took only seven plus years to recover, but things were not as out of whack as they were at the peak of the last housing market. Lending standards were rock solid for the most part back then and so there were a lot of people able to avoid foreclosure and ride out the storm (like me). I said I would normally agree with you. Unfortunately, if the US continues down the road of continuing with the runaway deficit spending and pushing trillion-dollar-plus socialist programs on top of that, it won’t be long before high inflation kicks in – which would result in prematurely rising home prices.

      @Mr. CC: Sage words, as usual, sir! In the end, it is those of us who have been financially responsible who will be left holding the bag for those who were not – and that’s when you will see the pitchforks and torches.

      @Wojo: I don’t follow the logic I guess. To me, if my home is providing me and my family with adequate shelter and meets our current needs (for example, is close to my job and is in a decent neighborhood), the fact that my home might be underwater is irrelevant when it comes to deciding whether I should strategically default. The profit/loss is hypothetical until I make a sale, yes? If I have no need to sell, and the house meets my all needs, why worry about it?

  3. 6


    I didn’t want to interject while the commentariat was busy holding court, but just to clarify…

    I did mention that owning a house, even one that’s depreciated, is better than renting and retaining zero equity. But this only applies to people who are in position to buy a house. I hated spending money on renting an apartment straight out of college, but I didn’t think there was an alternative with me having no equity nor work history.

    Alas, until recently it was given that equity and purchasing power were things you needed to amass before becoming a homeowner. But there’s no fun in waiting when you want a house NOW!

    Politicians maintain that homeownership is an unalloyed good. The masses then believe that’s true. It isn’t. A house may be symbolic of something, but it’s a commodity like any other fruit of labor – with variable pricing and a correspondingly variable supply. Some people can afford a house at certain times of their lives, others need to reassess before financing something so colossal that one misstep could send you to fiscal purgatory.

    James Stewart of SmartMoney ( just happened to write about the same topic this week, and he nailed it. Say you buy a house during a bear market, and the day after you close and get the keys from the realtor, the house appraises for a few dollars less in value. OH MY GOD, now you’re upside-down! Time to panic.

    It isn’t. A house is a long-term investment, unless you’re Abe Vigoda. Six years from now, your house could have positive equity again. Default or walk away, and six years from now you’ll still be patching up your credit.

    Thanks for your insightful comments. And of course, thanks to Len for letting me post.

  4. 7


    In a word, Sam: No.

    Please…Give me a wink if you are using subtle sarcasm to make your point (that is what “tongue in cheek” refers to, a subtle form of sarcasm).


  5. 8

    Heather T says

    I was going to get all feathers ruffly about the Detroit comment, then I realized… you’re 100% correct.

    Wojo – can you mom buy the house she really wanted in the first place and rent out the place she has already? Cake + eating = best of both worlds!

  6. 9

    James S says

    I think evryone has missed the point here. Why is it that I work my tail off, pay high taxes because of my hard work, and can’t get any help with lowering my mortgage interest rate while someone who works less and pays less taxes gets all the help? This is why I am so mad at the banks. They help those who do not help themselves. I guess I would be the bad guy for walking away from my mortgage while some less fortunate people get all the help…BS!! I can afford my payment but can’t get help because I make too much money! Are you kidding me? MY tax dollars helped these banks in a bailout and I get nothing…BS!

    • 10


      I don’t like any of the bailouts either – for the banks or for homeowners. Your point is well-taken: This is why the misguided bailout mentality is so dangerous – not only are they tough to discontinue once the government starts handing them out, but eventually everybody wants “their piece” of the pie too. It is a vicious cycle that will eventually destroy our economy.

      The short-term pain of creative destruction is always better than the band-aid approach of bailouts – which only drag things out and make things much worse for everybody.

  7. 11

    Jon says

    ‘obligated to the lender’ ?? ‘stealing from the lender’??

    I tripped over this dumbly ‘written’ ‘article’ while reading another, far more interesting blog but felt I had to comment because whoever wrote this dreck needs to pull their head out of their ass. F*** you. You completely miss the point. THE LENDERS ARE RESPONSIBLE FOR THE MORTGAGE MESS. Get it?? While you’re busily pontificating about bull$hit, Goldman Sachs is deservedly getting reamed. Get off your brokeass soapbox, shove a sock in it, quit paying your hosting bill and let this dumb blog die. I don’t give a shit about whose houses lose ‘value’ while half the neighborhood defaults. Corruption in the US is a far, far bigger problem than ‘green pools’ and ‘brown lawns’. Jesus, I’ve read some dumb $hit this week but this ridiculous waste of words is the dumbest $hit yet.

    • 12



      Len’s brokeass soapbox notwithstanding (apparently you have trouble reading bylines), you’re absolutely right. I was going to dismiss you as a ranting fool who thinks it’s the height of typographical wit to replace s’s with $’s, but you put me in my place with your reasoned arguments, each one defended by reams of unshakable data. Carry on, good sir.

      • 13


        Just for the record… It was I, the proprietor of this brokeass soapbox, who replaced the s’s with $’s. And the “uck” with “***” too.

        This is a family show, you know. 😉

  8. 14

    IPayMoreTaxesThanYou says

    Blame the government for the mortgage disaster? lol It was the loser deadbeat that bought a house that their Discount Tire job couldn’t afford. Way too many loser deadbeats in this country. Way too many.

    I’m sick of all the deadbeats that get the loan modifications. I know people that the loan was modified from a $1400/month payment to a $500/month payment and the interest rate reduced to 2%.

    I did things right. I went to school (a VERY long time), took out student loans to pay for it. Got a good job, and bought a cheap townhouse. Being single, I pay an obscene amount of taxes and I mean obscene. No really obscene. After taxes, and other common deductions like health insurance I see only 50% of my income. Rand Paul save us. I’m tired of carrying the weight of the obese deadbeat on my shoulders.

    Now I NEED to get out of my townhouse (won’t go into detail why). My townhouse is upside down because of the mortgage disaster. I blame mostly the deadbeats for taking a loan out for more than the GED skills can pay for in driving up the costs. I never EVER miss a payment on any of my obligations so I won’t qualify for Obama’s deadbeat free money program. So I am going to carry two mortgages while the deadbeats get MY tax money to pay for theirs. That’s OK you f’n deadbeats. I’ll take care of you. LAZY bastards.

    You’re a deadbeat. Why would you get a loan for more than you blue-collar job could pay for? Thanks for driving up the prices for us responsible people. It’s people like you that ruined it for the rest of us.

  9. 15

    Spedie says

    I take a bit of offense at the ramblings of IPayMoreTaxesThanYou. For this angry person, I respond:

    I don’t wanna hear that your townhouse is underwater.

    I don’t wanna hear you want to dump it for whatever reasons but can’t because you don’t do that. I think you are strapped when you mentioned two mortgages (I suspect a divorce going on here). What is strapping you is your student loans.

    I don’t wanna hear about your insane taxes.

    Obesity has nothing to do with it. The reason that a big chunk of American’s are overweight/obese is because soy is destroying their thyroid glands. I am a perfect example, physically, of this Soy poison. I won’t go into details about it here, suffice it to say that soy is the problem in the American diet, not SALT! I was previously borderline obese. In 5 months of not eating soy and all it’s little cousins, I dropped to a normal weight without diet or exercise changes!

    I just got married this past March. I, too, pay insane taxes. Vote, instead of rambling on this website.

    My house has dropped from $289K to $210K. Am I walking away from my mortgage? No, why you ask? Because I went to college and did it DEBT FREE. No school loans for this chick! Yes, it took me twenty years to cash flow it while being the mother of two babies. But I did it!

    I am also not underwater on my home. Why? Because I got a confirming 15 year mortgage, put 20% and paid ALL the closing costs at closing.

    So stop blaming your situation on fat people and your own bad decisions. Get out and VOTE!

  10. 16


    Spedie: Yes, we can’t rule out the dangers of soy. But why no mention of the Trilateral Commission, the Rand Corporation and the other tentacles of the military-industrial-agrobusiness complex that are putting PLUTONIUM in our drinking water and RADON in our leach fields? I went in for dental surgery last week, and when I woke up, there was a satellite receiver behind one of my bicuspids. The “visiting” dentist left town, and late at night I can hear messages from Kim Il-Sung. No, not Kim Jong-Il, Kim Il-Sung. The father. Who allegedly “died” in 1994. DID YOU SEE A BODY? I didn’t.

  11. 18

    Financial Bondage says

    I agree, pay what you owe. Or sell it or short sale, something. But walking away is lamer. For a Christian, walking away is not an option.

  12. 19


    Uuu…I can’t wait for the comments! :) Flexo had the strategic default discussion about a year ago, and it still gets people ranting from both sides of the fence to this day.

    I’ve about talked this topic to death, but here’s my 2 cents:

    I believe in personal responsibility and the sum of individual actions affecting the whole. However, people will always look out for #1. In most cases, that means they will choose to foreclose if it benefits them in the short term or the long term. Most people will consider their social and contractual obligations LAST over how they can “get out of” a bad choice they made…or just hurt feelings about “lost money” in equity.

    Blame the banks, blame your neighbor, whoever else you want…it all comes down to looking out for your best interests. And that, my friends, is human nature…

    What would I do? Eh…don’t really know…I still rent. :)

    • 20


      I can definitely speak from experience on this topic. I bought my first house in 1990 at the top of the real estate market in Southern California – I could not have timed it any better! LOL I was upside down on my mortgage for seven long years. To make matters worse, the house I lived in was about 50 yards from a set of railroad tracks that saw very heavy freight and commuter train traffic.

      Although I wanted to move I couldn’t afford to come up with the extra money I would have needed to pay the bank. So I sucked it up and made the best of a bad situation until I could finally sell the house in 1997 without me taking a loss.

      A lot of you are probably saying I’m a sucker. Maybe so, but I felt at the time – and still feel to this day – that the strategic default is unethical and it reflects poorly on an individual’s character. (That ought to tick off a few people.)

      Being upside down on a house isn’t the end of the world. You still get use of the house, for example.

      I’ll argue that most people who have no problem with the strategic default also buy in to the entitlement mentality that currently pervades this country: “I bought a home and therefore I am entitled to make an immediate profit off that home.” Those that don’t end up feeling as if they were “misled” by the banks that loaned them the money – which justifies screwing the banks.

      Total BS.

      Thanks for the comments, Kevin and Wojo!

  13. 21


    The fact that so many people are just walking on their mortgages confirms that for many of them, the “beloved home” was really little more than an investment. That’s really the main problem in the housing market right now, there are too many who bought–and overbought–for the wrong reasons. Unfortunately, that pattern also pushed prices to unsustainable levels that even those who bought for the right reasons are struggling to deal with.

    Of course, the banks DO get plenty of blame here, after all, it was their aggressive, accomodating lending that made it possible for people to purchase a property for several times a buyers annual income, and to do so with just a few thousand up front. Who didn’t see this coming???

  14. 22


    Am I violating protocol by making two successive comments?

    Wojciech’s comment hit at the same time as mine, and I have some thoughts on it…

    Wojciech–I agree with what you say, but I think what we’re seeing is the herd mentality playing out. People flocked to get in on the impossibly good deal of buying, now they’re flocking to get out of what’s turned out to be, in hindsight only, a certified nightmare.

    This is the very definition of a mania! Mindless entry to the game, followed by a desperate lunge for the door on the back end. I’m not justifying what anyone is doing, I’m only pointing out that we gain courage and cover when we’re moving with a crowd. Only four years ago, walking away on “The American Dream” was viewed like the scarlett letter–now it’s the new in-thing.

    As much as we like to pat ourselves on our collective backs for our “brilliant” knowledge and technology, we still have more in common with lemmings than we’re comfortable admitting.

  15. 23


    Good point, Kevin. I think you’re in the clear about protocol, by the way :)

    It really IS the new “in” thing to foreclose. I wrote on my blog a few weeks back that many people wear it as a “badge of honor,” as if they’ve been to some war zone and back and emerged bruised, but alive. They seek out others who have been through the same experience to create camaraderie.

    Seems like the right way to go is always AWAY from what everyone else is doing…

    So if everyone is buying up these cheap houses right now, are we too late? Or too early? Hmm…

  16. 24


    Okay, now I’m going to violate protocol with 2 comments! :) Len’s got me thinking about the whole idea of entitlement, but more specifically about how foreclosure is viewed in other parts of the world.

    The U.S. strikes me as very unique in our foreclosure process…can anyone speak to how things are in the rest of the world? From what I have heard, it’s much harder to just “walk away” from your loan obligations in other countries.

  17. 25


    I think it comes down to the situation. For example, I have a relative that lived in Michigan and worked as an engineer for a auto parts manufacturer. Needless to say, he was laid off. He couldn’t find work in the area and needed to move where the jobs were. He found a job in NC and ended up just handing over the keys to the place in MI. He tried everything to get it sold (short sale, etc.) but he just couldn’t find a buyer.

    I don’t look down upon him for doing what he did. He did what was best for his family and he learned from his mistake. So, I guess I am saying that it just depends on the situation. If you are just tired of making the payments and just not getting anywhere, suck it up and make the payments. Don’t walk away just because it’s easy. But if handing over the keys is the last resort to protect your family, by all means.

    P.S. You need the subscribe to comments plug-in!

  18. 26


    Here in Canada, mortgage loans are recourse. You can’t just walk away. If you can’t pay your mortgage, the bank sells the house under power of sale and you are still responsible for the difference. Further, if you don’t have 20% to put down, you pay extra for mortgage insurance.

  19. 27


    What a lot of people who walk away might not realize is in some states they could be on the hook with a deficiency judgement down the road. That could be potentially tens of thousands of dollars or more.

    In the end, I don’t really care one way or the other if people decide to willingly walk away. My only issue is that the penalties for defaulting on a mortgage must be stiff and must be enforced. The hit someone’s credit takes from walking away should be severe enough that it pretty much means someone will not be able to buy a house for at least 5 years. But the minute that the government, credit bureaus, or whoever begin to minimize the impact walking away has on your credit score so that people can immediately go back and get another mortgage you’re simply rewarding the behavior. In the end, nobody will have learned a lesson and everyone pays for those actions.

  20. 28


    While I am a proud Canadian and I would love to be smug about our banking regulations, I have to say that I don’t think we’re out of the woods. We did fare comparatively well during the worst of the crisis, but I think the lower interest rates that resulted from central banks’ attempts to rescue banks and borrowers may have guaranteed another crisis.

    Home prices have risen a lot in Canada over the past year thanks to extremely low rates. If rates were to rise, even a little, there is widespread belief that a lot of people would not be able to afford their mortgage payments if they have a variable loan or when their mortgage term renews.

  21. 30


    Wojciech – You’ve upped the ante by adding two more consecutive comments to the thread. Now I have to spend the time and effort to add 3 new comments. I’m threatened by this because I chose this thread to hijack–you need to go find your own! 😉

    But seriously, I think you’re referring to victimhood, and that’s been quite a cultural phenomena for a few decades now. Maybe we can blame radio and TV talk shows for giving an audience to so many. People join together with other “victims”, find common ground and parade their struggles with other victims who understand.

    In the middle of this though, we DO have to be sympathetic to people who really are victims, like those who lost their jobs and really can’t pay anymore. If you have to chose between “honoring your mortgage” and taking care of your family, the only truly honorable choice is taking care of your family.

    Also, a lot of good people got caught up in the housing mania because the whole system was herding everyone into it, from the gov’t pushing the “virtue” of homeownership for all, to tax experts, realtors, ez money lenders etc. It’s easy to forget that the people warning of the dark clouds on the horizon were ignored and labeled as doom and gloomers when the mania was in full bloom.

    We’re always in trouble when we’re all heading in the same direction. Objectivity is the first casualty, all the rest is inevitable.

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