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.
Shackle was never late with a payment, she said. But after paying the bills she had no money left over to buy groceries, and lost nearly 50 pounds. Despite her pleas, she said she couldn't get the lenders to refinance once the collapse of the housing market had slashed the home's value to about $150,000.
Suddenly it was no longer about an investment or the tax advantages of homeownership, it was about trying to survive the crush of bills.
"When you're a homeowner you think, 'OK, I'm going to go ahead and try to pay this off,'" she said. "But when I tried to get refinanced and everybody pretty much shut their door on me, I felt like I had no alternative."
Rather than stop paying and wait to be foreclosed on, she sought help from You Walk Away, one of the companies that has emerged to address the growing number of underwater homeowners. The San Diego-based business counsels the homeowners to, as its Web site says, "take control of their financial future" by making a strategic decision to default if necessary.
Jon Maddux, principal and co-founder of You Walk Away, which charges $995 for consultations about their rights regarding foreclosure, says his company doesn't advocate jingle mail per se but rather staying in the home as long as legally allowable until the bank takes it back.
Underwater homeowners should exercise caution when signing up for any service that offers assistance, because consumer advocates say much of the advice can be found online or through non-profit agencies.
Shackle moved out of the condo in July and rented an apartment for $750 a month. Foreclosure still hasn't taken place. But without the burden of a mortgage gone bad, she says, now "I sleep a lot better."
About 1 in 6 of the nation's 75 million homeowners are underwater, according to Moody's Economy.com, and the total has doubled in a year. Their mortgage debt exceeds home equity by an average of $40,000. Half of these negative-equity homeowners owe more than 120 percent of their home's value. And 30 percent of homes sold in the past year were sold at a loss, according to real-estate Web site Zillow.com.
But as with personal bankruptcy, the cost of wiping a mortgage slate clean can be steep. A default will devastate your credit rating, probably making it impossible to get any kind of loan, and could even prevent you from getting a job.
Ethan Dornhelm, a senior scientist at Fair Isaac Corp., which sells credit-scoring formulas to credit bureaus, says consumers who have never missed a credit payment before would sustain an immediate hit of 200 or more points to their score if they defaulted on a mortgage.
Restoring your score to a level where you would qualify for credit at reasonable terms would take a minimum of three years even if you kept up with other credit obligations, Dornhelm said.
Another reason not to walk is that housing prices may recover.
Perhaps the biggest risk is that the lender will come after your other assets or garnish your income.
Experts say the incentive to walk despite all those costs is highest in states that prohibit mortgage lenders from suing the borrowers for additional funds after foreclosure. That means it's not illegal to walk away in those states, but what about the ethics of such an act?
Gelinas of the Manhattan Institute says it would be unfair to portray mortgage walkers as villains because it's not unethical to take a loss and walk away from a bad investment that might keep you stuck in a "money hole" for a decade or two.
"Certainly you shouldn't commit fraud when taking out debt," she said. "But when it comes to sacrificing for years and years to keep servicing debt on an inflated asset when the bank lent money against the inflated asset — you can't blame the homeowner for that."
Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.
"These anti-deficiency laws make a huge impact on foreclosure rates because they are basically 'get out of jail free' cards," said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who's writing a book on consumer bankruptcy and consumer credit.
This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways.
The full list: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.
Donald Lampe, a Charlotte, N.C.-based mortgage lending attorney with Womble Carlyle Sandridge & Rice, said the statutes generally prohibit or limit a lender's ability to go after the borrower's assets to satisfy the unpaid mortgage debt.
"There are some folks suggesting that state anti-deficiency laws should be expanded around the country as a response to the "mortgage meltdown," Lampe said. However, he noted, "It is difficult to see how these laws could be made to apply to loans already on the books."