Grim choice: Walking away from a mortgage

updated 5:00 p.m. ET Dec. 18, 2008

CHICAGO - Diane Shackle found it gut-wrenching to walk away from a mortgage she took out in times that were better for both her and the U.S. economy.

But the reality was undeniable: While she was keeping up with the monthly payments, she said she could no longer afford to buy food for herself or even kitty litter for her two cats.

So the 44-year-old cocktail waitress walked away from her two-bedroom condo in southern California last July, turning her back on a debt of nearly $200,000.

"It ripped me up to do it but I was tired of worrying and I had no food in the house," said Shackle. "I decided, you know what, I'm not living like this. I've got to quit (get out) before I kill myself."

Walking away from a mortgage has always been a homeowner's last resort — it flies in the face of the American dream. And experts say it should remain a worst-case scenario.

But with the deepening economic crisis fast adding to the 12 million mortgages already "underwater" — the term for when a home's debt exceeds its market value — it's an option more are likely to consider as home prices continue to fall.

Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations.

"You have to make the best decision for yourself, business-wise, which could be walking away from the house," said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.

Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices. The practice also is known as "jingle mail," referring to the borrower mailing the keys to the lender and surrendering the house.

Bank of America Corp. brought the practice to light a year ago, reporting that a growing number of people who defaulted on their mortgages were current on their credit cards. This suggested that at least some saw bailing out on their houses as a way to gain control of their finances.

Though statistics aren't readily available on the number of mortgage walkers, a year later, Bank of America spokesman Terry Francisco acknowledges that the problem still exists and said it has been exacerbated by the housing market's further decline.

"The billion-dollar question is, is it going to increase?" said Guy Cecala, publisher of the trade publication Inside Mortgage Finance, in Bethesda, Md. "We really don't know the answer."

Speculators who bought houses for investment purposes rather than to live in are the likeliest to do it, he suggested.

Shackle doesn't fit that category. The single, first-time homebuyer bought a two-bedroom condo in Calimesa, Calif., in 2006 for $191,000. She wasn't required to put any money down despite her limited income as a waitress, thanks to a lofty credit score of 788.

The financing consisted of two interest-only loans with initial rates of about 7 percent and 10 percent. Her monthly payment, including an escrow account for property taxes and insurance, was about $1,400 a month. That was manageable until she had serious problems with asthma and missed a lot of work.

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