On radio, I am still asked about the morality of walking away from an underwater home -- but the question is fading fast. By mid-2012, the question will be "Who wants to be the last American paying down a $400,000 mortgage on a $200,000 house?"
More accurately, perhaps, the question is almost gone. Good radio hosts still question the morality of walkaways, because questioning is part of their job, and because the issue still weighs heavy with some of their audience. Then the radio producers funnel through some critical callers to keep the comments balanced.
One recent radio caller criticized home walkaways, and then detailed his two-year struggle to carry out a short sale on his own underwater house, being foiled by bank bureaucracy every step of the way. By the end he had undone his own point, and I asked him, "If you 'tried to do the right thing,' and the bank has screwed you at every turn... what is your issue with people who just walk away?" By then he seemed to be wondering the same thing.
Another critic launched a tirade against walkaways from high moral ground, or so he thought, saying he had been faithfully paying his mortgage on time for 15 years. On questioning, it turned out he had bought during the real estate price downturn of the mid-1990s, and gotten his house at below market value. When I asked if his house was now underwater, he said "No."
In this age of social media, I regularly hear from listeners after radio shows, and many of the listeners had been highly annoyed by that particular critic -- they simply wanted to know more about the mechanics of walking away, and the tirade had cut into my how-to time.
There are a still few regions where foreclosure is never discussed beyond the immediate family, but it's less and less often due to the morality issue. In the more status-conscious parts of the San Francisco Bay area -- namely those enjoying a mini-boom in hightech -- foreclosure still carries a burden of shame, but the concern about being a "loser" far outweighs any moral concerns. A mere 20 miles away, in the "outer Bay" area, it's no big deal to discuss a home walkaway, since in some areas everyone knows that you're probably underwater if you bought after 2000.
More dramatically, in developments built since 2000, in most parts of Arizona, California, Nevada and Florida, all the houses are now underwater -- the only real question is whether your lender will come to their senses and knock down the principal before you stop paying the mortgage.
This, I believe, is the beginning of the fourth and last wave of home walkaways.
The first wave was strategic defaults -- people who could afford the mortgage without dipping into savings, but chose to abandon what they considered a bad investment. They were the people that everyone loves to hate: the true deadbeats, the "serial bankrupters," and the Porsche-driving yuppies. A few are still living in the homes rent-free, but most have long since moved. (The rich defaulted and disappeared long ago.)
The second wave was the situational defaults -- people who were laid off, couldn't afford the payments, and were foreclosed on. These are continuing, particularly as unemployed people who were barely hanging on continue to fall off the unemployment benefit rolls.
The third and continuing wave is what I call prudent walkaways -- people who can afford the payments for a while longer, by exhausting their 401Ks, childrens' college funds and other savings -- but are now choosing to default before they are financially ruined.
The fourth (and perhaps final) wave, as the moral issue vanishes, will be a new breed of strategic defaulters -- the remaining solid, average Americans who finally grit their teeth, sit down with a calculator, and ask themselves why they want to spend the next two decades buying a house for twice what it is now worth.
The way the housing situation is moving at the moment, in a couple of years this will leave the last contract-thumping moralist standing alone on their front lawn, shrieking "Do the right thing! Two wrongs don't make a right!", while passing neighbors look on with pity as they move on with their own lives.
But "the moment" changes fast in the Great Recession, and home walkaway is no longer the clear best financial choice that it was in 2008. This is because while a nationwide Federal homeowner bailout is unlikely, the FDA may push for faster principal reductions in some circumstances (they are under pressure to do so from various public interest groups). Also, banks may move faster to reduce principal.
Follow Nicholas Carroll on Twitter: www.twitter.com/WriterNicholas