Why not just default on the mortgages?

Some mortgages are not non-recourse, so you could be forced into bankruptcy. Either way, your credit is going to take a big hit, which may mean you're stuck wherever you moved to, since many landlords will avoid renting to people with recent forclosures or bankruptcies. (Probably a good idea to move before you default). A lot of people are uncomfortable defaulting on a debt if they have the ability to pay, even if it's the smartest move economically.

100k down on a 500k house for 20%. Value dips significantly and your house is worth 300k. You owe 400k on a 300k valued property. You default and your 100k is gone forever. Do not pass go, do not collect 200 dollars.

So? It's gone forever whether you default or not.

How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).

> So? It's gone forever whether you default or not.

Your premise assumes housing values never go back up. The value is not necessarily gone forever.

The house that declined to $300k can climb back to $400k or $500k.

You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery).

Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away.

Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.

How about default, and then buy back from the bank, maybe at an auction at $300,000...

If you have the cash to be able to buy the house outright why would you default in the first place? Otherwise, after a default (which likely includes bankruptcy) you will be unable to get credit.

Because the house is worth less than the loan... you don’t have to go bankrupt to default on non-recourse home loans as far as I know.

Exactly. That's how the "mortgage crisis" happened.

In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.

Yeah that is how they really get you.. They want their pound of flesh..

This was the scenario that I saw during the mortgage crash. People who would have to pay the bank tens of thousands of dollars in order to "sell" their house.

Then those people had spent beyond their means when they purchased the home. When you buy a home, part of the risk is that most of your net worth is wrapped up in the home, and as a result you may not be able to move if you have to sell at a harsh loss. If you are not prepared to ride out a dip in the housing market, you shouldn't buy in the first place.

The problem is that if everyone is making stupid bets (and the bank is also making stupid bets), you may also have to make a stupid bet if you're determined to own your home.

Or you could rent, but that's not just an economic decision.

Or, you could rent and live frugally before the crash, and then buy cheaply.

10s? To be so lucky...