If Morgan’s hypothesis is correct, and many people decide to walk away from their homes (when they are deeply under water) wouldn’t it be better for lenders just to forgive a large portion of the mortgage rather than to face foreclosure and the disaster of taking a massive loss in the real market?

In this example a lender could forgive maybe $100,000 of the loan. Sure, maybe the borrower can still afford to make the payments on the full amount, but if there is a risk they will just walk away the debt forgiveness might be worth it.

1. Is my credit and my home worth more than the $150,000 I’m currently negative? And, am I going to live here long enough to recoup that equity?

I’m going to conjecture and say that for most people the answer is no. If the answer is no then you have to look at your options for getting rid of the property either via a short sale (if you can prove economic hardship) or you have to decide to let the property become delinquent and then negotiate a cash for keys/deed in lieu of foreclosure and take damaged credit for a few years.

I can’t tell you what the right answer is, as it comes down to personal choice. I think that any one who is upside down by 40% would probably do well to get out of the property.

No, imho most of these buyers would be better advised to reduce their monthly obligations significantly by giving the estate back to the lender “in lieu” and to build up a nest egg for hard times instead (or a more reasonable and better backed up house purchase after the credit rating has recovered). Well, this might come as a surprise for many, but you really can RENT a house for less than half than the ongoing mortgage payments, and you don’t have to cope with losing equity this way. Defaulting on the contracts might be not the most ethical thing to do, but , honestly, what ethics were in play at the bank or the agencies, those professionals who pushed buyers into these horrible deals even though they should have known better? And should a hyperbolical understanding of ethics keep you from doing what would be the best for your family?

Well, if I was in that situation, I would act as egoistically as the brokers did before and would try to shift as much of the burden as possible towards them. Just my personal opinion, of course, your mileage may differ.

Should someone who is still employed, and fiscally healthy, continue to make payments? Or is it in one’s financial interest to just cut their losses (and credit rating black mark) and hand the keys back to the bank?