My wife was watching a program in the next room about individuals and businesses walking away from "underwater mortgages" (mortgages where more is owed than the current market value of the property). I wasn't listening carefully, but I did hear someone talking about it as a "business decision". I disagree.
In a real estate transaction involving a mortgage, the seller always gets paid the full amount. The only risk for them is that they may miss out on the chance to sell for more if the value of the property goes up.
The other two parties -- the buyer and the lender -- take on two types of risk: the risk that the buyer will be unable to repay the loan, and the risk that the value of the property will drop.
But who's taking on which risk?
Technically, the lender is also taking on the risk that the buyer won't repay the loan, even if they are able to. In times when property values are stable or rising, this isn't a problem, because the buyer would be foolish to default, and even if they do, the lender can simply foreclose and get their money back.
Because that usually isn't a problem, it probably doesn't figure into the rates and fees lenders charge -- at least not much.
The way I see it, the buyer should bear the risk that the property value might drop, and lender should bear the risk that the buyer won't be able to pay. Unless you've explicitly agreed otherwise, the lender isn't your business partner in your real-estate buying venture -- they're a money lender to whom you've committed to repay.
That's the way it works with unsecured loans like credit cards. Your credit card company doesn't worry about whether your plasma TV's value is going to drop after you buy it, or whether the value of your Caribbean cruise is going to drop after you get home :-).
A mortgage lender is loaning you a lot more money than most credit cards, so they demand extra protection in the form of the power to force you to sell to get the money to pay them.
Credit card lenders, on the other hand, cover the extra risk they face by not being able to force you to sell a particular piece of property by charging higher interest rates. They use the interest they succeed in collecting from most people to cover losses from those who don't repay.
It makes sense to spread risk in those ways. Forcing everyone to pay higher interest on home loans to cover losses from defaults would unfairly penalize good borrowers. The ability to foreclose makes that unnecessary. With credit card loans, on the other hand, there's no practical way to collateralize the loan, so high interest rates are a good way to spread the cost of the risk.
(Note: I'm not saying that I don't think credit card companies are blood sucking criminals who charge way too much in interest and fees -- I do -- and I think a lot more people would be able to repay their credit card loans if their interest rates didn't go through the roof just at the moment when they can least bear it. I'm just saying that it's appropriate to charge higher interest for unsecured loans than for secured loans).
When someone walks away from an underwater mortgage, sure, it may be good for them (although it'll leave a big black mark on their credit for a long time). But that doesn't make it ethical. Somebody's going to bear the brunt of the drop in property value. That somebody should be the buyer.
Think of it this way: if you'd used $300,000 that was stuffed in your mattress to buy your home instead of only pulling out $60,000 and borrowing the other $240,000, you'd be accepting 100% of the risk of the property value dropping, right?
Is the purpose of taking out a mortgage to shift some of that risk to someone else? No.
The purpose of a mortgage is to enable you to buy something that you don't enough money for right now. Or if you do have the money, but it's invested where you think it'll earn more than the interest you're paying on your mortgage, the purpose of the mortgage is to enable you to keep earning higher interest.
When you borrowed the money, you committed to repay. Forcing someone else to pay to bail you out -- just because you can -- is not a business decision. It's unethical.