I blogged on this subject many months ago. Recently the debate has popped up again.  

A recent study determined that homeowers are willing to walkaway after their homes start to decline by more than 10%.  

http://news.prnewswire.com/ViewContent.aspx?ACCT=109&STORY=/www/story/06-26-2009/0005051034&EDATE=

There is a debate here on activerain about whether this is a moral issue or not. 

1.  By giving credit to anyone with a pulse the banks allowed to demand to outpace supply. Prices went up. 

(The fed created the bubble by allowing credit to loosening during a bubble.  The fed is owned by regional member banks.  Those banks are owned by shareholders.  Banks like JP Morgan Chase own those shares.) Therefore the banks created a bubble and then they created the contraction by tightening lending standards.  

By controlling credit, the banks allowed prices to rise, and then by tightening credit the banks forced prices to fall.  

It can be argued the banks as a group do not deserve the benefit of their bargain.  

Real homowers who have lost their equity seem to have entered into the arrangement in good faith.

I can not say the same for many if not most lending institutions.  

2.  The banks were in league in with the builders.  The builders took large blocks of relatively worthless land and built new overpriced, over upgraded homes on formerly almost worthless lots.  Because homes look good people wanted them.  By forming joint ventures with the lenders the banks found ways to have under qualified buyers overpay for properties.  When those buyers could not flip for a profit they stopped paying. Leaving their neighbors hundreds of thousands in the hole.  The lenders sold and the banks lent on over developed homes.  This should be the real function of an appraiser.  They should stop over payment for over developed properties.  Oh wait the lenders were rigging those as well.

3.  The banks did not just accept an borrowers promises to pay.  In california they secured that promise to pay with real property.  In doing so they entered into a statutory framework which in my opinion replaces doing the right thing with following the law.  

For instance with CCP 580b California decided that the risk of a property being over priced should be placeed on the sellers and the lenders -- not the purchasing homeowner.  If a person defaults and the bank forecloses on a residence with purchase money loans, the bank gets the property back as full settlement.  see CCP 580b for full details.  Therefore, the borrower pays off the entire loan after a foreclosure in this situation.

The bank was the short term profit making  "fool" who took the risk by not requesting 20% down. The lenders irresponsible actions (and short term profits) have virtually bankrupted america.  

While I think every situation is different, in many cases I see walking away from the property as the right thing to do.  Especially for those who can not afford the tax consequences of a short sale.  

for more on walk away

for more on short sales