There are trade-offs. Yes they live rent-free for a time, but then their credit is killed. A foreclosure on your record can be worse than a bankruptcy on your credit report.
People walking away has made the housing foreclosure problem much worse. Anecdotal evidence is that some who could afford to pay just decided not to. Not every foreclosure is a story of job loss and illness draining savings and all that.
If they were going to bail out the banks, they should have just bailed out individual home owners. Yes it sucks that they get rewarded for bad behavior, but at least it keeps home values up for the rest of the market.
We all know what happened when the banks got the money. They get paid back for the “toxic” assets, but still foreclose and take the house back. Values drop, and what happened to all the cash the bank got? They just sat on it.
I personally know several people who have walked away from houses when they were having no trouble making the payments. In most of the cases the value on their home dropped to less than what they still owed and they made the decision to do a “short sale”. There are many Realtors who specialize in short sales. The Realtor arranges a sale for less than what is owed to the bank, and coerce the banks to accept less money than what they are owed.
One of my “friends” found a younger girl friend and divorced his wife of twenty seven years. To pay off his ex-wife he refinanced the house with a local credit union. A couple years later he decided that the house wasn't worth as much as he owed and had a short sale arraigned. He makes around $130,000 a year and his new wife makes around $100,000. Their payments were around $2000 a month on the house. They could have rented the place for $1500 a month, but they were told that the short sale wouldn't mess up his credit for more than a couple of years. The Credit Union took it in the shorts and my “friend” walked away with his ex-wife paid off and no payment on the debt.
Why the banks agree to arrangements like this from people who can obviously afford the payments I don't know. It is not right and it is hurting the rest of us.
My brother-in-law got reassigned to a different military base after he got back from Iraq. Unfortunately, they bought near the peak of the market so they couldn't sell their house because it is now worth half what they paid. They are living hundreds of miles away renting their house to a series of dead beats who have messed the house up. They are renting a crappier place where they now live because they can't buy another place because they owe so much on the place that was close to where he used to be assigned.
My brother and sister-in-law make a heck of a lot less than my "friend" and his new wife but they are determined to stick it out because they believe in keeping their word. They say the mess they are in is their own fault for not renting to begin with, but I remember how excited they were to buy their first house. There is a big difference in the way people look at this type of situation.