White says Pedowitz and others in the industry are using "scare tactics" and argues that the consequences are not quite as dire. If you start with good credit and continue to meet your other credit obligations, you can restore your rating to above 660 in as little as two years following the foreclosure. White says you can even qualify for a federally-insured FHA loan to purchase another home within three years. And, he adds, Congress has waived tax penalties for foreclosures until 2012.
The foreclosure process, meanwhile, typically lasts a few months and costs less than $10,000.
Pamela, an executive recruiter in Madison, Wisc., who asked that her last name be withheld, says she prefers to sell her home at a loss rather than foreclose.
After a divorce, two lawsuits and a drop in business due to the recession, she's having trouble making her mortgage payments. The value of her condo has dropped by more than a third in the past two years. The developer started liquidating vacated units in her building at fire sale prices to pay off debts. Pamela considered going into foreclosure, but instead, plans to sell her condo and eat the loss.
"There's a bit of pride there," she says. "I'd be embarrassed if I foreclosed on my home."
It's not just embarrassment that's to blame. Americans believe strongly in the value of homeownership, even if owning one's home – as opposed to renting it – is more expensive.
"Homeownership is … an extension of self; if one owns a part of a country, one tends to feel at one with that country," Robert Shiller, a Yale professor and widely respected real estate expert, wrote in an op-ed piece in the New York Times last year. "Policy makers around the world have long known that, and hence, have supported the growth of homeownership."
Of course, there's nothing wrong with wanting to fulfill one's obligations. The American work ethic, handed down by Puritan ancestors, is built on a strong commitment to duty. But when those on the other side of the contract – lenders – are acting on a different set of norms that requires them to maximize profits instead, homeowners end up bearing the brunt of the cost, says White.
"There's a double standard," he says, pointing out that banks have received trillions of dollars in bailout money to help them minimize their losses. "A corporation would walk away in a New York second from an underwater mortgage."
To make matters worse, many Americans who are so far behind on their mortgage payments that they have little hope of ever catching up, are still trying to make their payments. Some take out more credit card loans or cut back on essential spending.
With little regard for their personal circumstances, lenders continue to demand payments, even when they know the owner will foreclose eventually.
"I see it all the time. Lenders try to sneak by," says Darren Hamm, a housing counselor at Neighborhood Housing Services of Greater Cleveland, who helps owners negotiate loan modifications and foreclosures. "Even if you're behind, they try to get you to repay it as if you could catch up. But they're just stacking the deck."