Is walking away smart if home underwater?

updated 3:16 p.m. ET Dec. 4, 2009

NEW YORK - Stop paying your mortgage.

That's the underlying message from a University of Arizona law professor, whose new paper is hitting a nerve as the nation's housing crisis enters its fourth year.

Brent White denies advocating walking away from a mortgage that is bigger than the value of a home. Nonetheless, he lays out a case of how it can be done, and his suggestions have gone viral, popping up online, in newspapers and on television.

White is hardly first to talk about the idea of walking away from a mortgage that is bigger than the value of a home. Nonetheless, his suggestions have gone viral and are popping up online, in newspapers and on television.

It's a move that can save some people money, but at the expense of wrecking their credit.

The topic is central to what's crippling the housing market: About one in four homeowners, or 10.7 million Americans, are considered underwater, meaning their mortgage exceeds their home value, according to real-estate information company First American CoreLogic.

In the markets hardest hit by the nation's housing bust — Florida, Arizona, California, Michigan and Nevada — the share of homeowners who are underwater is 40 percent.

"Millions of Americans would be better off financially if they did walk away," says White, who authored the paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

What White is saying goes against everything that we've been taught about contracts. If you make a mortgage commitment, most people think you have a responsibility to pay.

On top of that, White suggests those who decide walk away should consider getting a new car or house before they default on their mortgage, which will constrain their credit.

National, personal financial risks
Imagine if everyone who is underwater walked away. It could cause economic havoc. Home prices would plunge even more. Banks would have even more bad loans on their books, which would lead them to make fewer loans to consumers and businesses.

There are personal financial risks, too. A foreclosure shows up on an individual's credit report for seven years, which will make it hard to get any loans during that time, according to John Ulzheimer, president of consumer education at Credit.com.

People who go into foreclosure but otherwise have good credit might escape in less time if they continue to pay their other bills on time. There is no magic number for how long that could take.

Mortgage lender Fannie Mae won't back another loan for five years for someone who was involved in a foreclosure, except when the default occurred because of an extreme circumstance like a medical event or unemployment.

"Walking away undermines the basis tenets of mortgage lending," said Brian Faith, a spokesman for the government-controlled Fannie Mae.

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