they can always sell the house and take the loss.
they can always sell the house and take the loss.
In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.
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).
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.
Or you could rent, but that's not just an economic decision.