The New York Times recently published an interesting article on the growing number of people that walk away from underwater homes. (When I say “underwater” I mean a home with loans that exceed value.) You can find the article here, but the gist of it is that an increasing number of people who have the financial capacity to continue paying their mortgages are abandoning devalued homes anyway.

The article (and the people interviewed in it) seem to be missing one crucial point. It’s not as easy as just letting the bank foreclose on the property and taking the hit on your credit. Home loans often have two documents underlying them. One is the promissory note that is the homeowners personal promise to pay the debt. The other is a security instrument (often a deed of trust) that gives the bank security for the promissory note. If the homeowner doesn’t pay on the note the security instrument gives the bank the right to foreclose. The result of the foreclosure is often an eventual sale of the property and application of the proceeds toward the promissory note debt.

Here’s the part that the article misses. The bank is still entitled to full payment of the debt shown on the promissory note. If the bank gets less than the full amount upon the sale of the property the bank can then proceed to sue for the deficiency.

In some states (such as Washington), if the bank uses a non-judicial foreclosure alternative (resulting in a trustee’s sale of the property) then the bank is not allowed to get a deficiency judgment. However, the bank is not required to use the non-judicial alternative and can instead elect to judicially foreclose upon the security and then get its deficiency judgment.

If you have the capacity to keep paying but decide to walk away because of the loss in value, what makes you think that the bank isn’t going to try to get the deficiency judgment against you?