The BBC has a story about how home owners who find themselves under water, owning more on their house than it is worth, are simply walking away. In most states, they have no obligation beyond what the bank gets from foreclosure. The result is that people who can still afford the payment are making a business decision to simply let the bank take the loss.
Housing prices are continuing to fall. There are some predictions that the ultimate floor on prices may be less than 50% of a home's peak value during the bubble. That means even people who bought with hefty down payments may find themselves owing more than they own. In addition, the premium for owning your own home over the cost of renting went up with the bubble and still hasn't come down again. So in many places, most people who own could rent some place similar for less money.
So does walking away make sense? If you look at it as purely a financial decision, it probably does. You will take a hit to your credit record. But unless you plan to borrow again in the next five years that may not matter very much. You are probably better off investing the money you save from renting than continuing to make payments on a asset which is declining in value.
On the other hand. A house is a place to live, not an investment. So whether to bail out is more a life decision than a financial one. Do you like where you live? Can you find a place you like as well. Will your kids need to change schools? In other words, how much is your current house worth to you? If it was worth the payments when you bought it, then it is likely still worth that to you now. If you plan to live in your house until the mortgage is paid off, it probably doesn't matter very much what the current market value is.
But many people chose a house for its investment value as much as a place to live. They didn't buy the house because they wanted to retire there, they bought it with the expectation that they would sell it and move up in a few years. If you are one of those people, don't stay trapped. The sooner you bail out, the more money you will save and the quicker you will recover financially.
One thing from the BBC article I would like to highlight:
"This is becoming a tsunami of voluntary defaults," Professor Roubini says.
"The losses for the financial system from people walking away could be of the order of one trillion dollars when the entire capital of the US banking system is only $1.3 trillion.
"You could have most of the US banking system wiped out, so this is a total disaster."That is a stark warning. But, in capitalist America, that is the way the system works. Better that they take the loss than that you do. When they loaned you the money secured by the house you were buying, the lenders understood that they were sharing the risk you took in buying that house.