MARGARET WARNER: Next: moving from the failings of Wall Street to homeowners in Florida who have decided to walk away from their mortgages.
Our story comes from "NewsHour" economics correspondent Paul Solman.
It's part of his ongoing reporting on Making Sense of financial news.
PAUL SOLMAN: Meet 28-year-old Josh Bartlett, West Virginia native, now a restaurant manager in Fort Myers, Florida. He lives in a condo he bought in 2005 for $210,000, with a mortgage of $190,000.
And what's this place worth today?
JOSH BARTLETT, homeowner: Forty-five thousand. I can go across the street, pay cash, and never have to worry ever again about a mortgage payment.
PAUL SOLMAN: Across the street, around the corner, with a 60 percent vacancy rate, Bartlett could buy at least four units in this development for what his place cost. But, as for never worrying about a mortgage payment again, well, it's not as if he's sweating over his current obligations.
JOSH BARTLETT: In December of 2007, I made my last payment, which every previous payment was on time. And I told them that, if they didn't adjust any kind of rates, any kind of principal, that they would not see another dollar from me.
PAUL SOLMAN: And that was the last time you made a payment, December 2007?
JOSH BARTLETT: Yes, sir. 2008 was a free year. 2009 was a free year, and, so far, four months into 2010.
PAUL SOLMAN: So, you could afford the payments that you're not making?
JOSH BARTLETT: Yes, I could afford that. But, when it's only worth $45,000, I would much rather flush my money down the toilet.
PAUL SOLMAN: As far as Bartlett is concerned, he and the bank are even.
JOSH BARTLETT: Well, I made a $20,000 down payment. I paid them two years of interest-only, which adds up to about, you know, roughly $30,000. So, you know, I'm -- I'm willing to walk.
PAUL SOLMAN: Bartlett is a part of a growing breed in the post-boom bust, strategic defaulters, those who can afford to make their mortgage payments, but refuse. With their home values way below what they owe, they figure, why throw good money after bad?
JASON WELSH, Golf professional: At some point in time, you have to cut your losses.
PAUL SOLMAN: Golf pro Jason Welsh figures he can rent for less, and save money for his kids' college education.
JASON WELSH: It's the smart business decision. It's not about whether I can afford the place or not. It's more about taking care of my family.
PAUL SOLMAN: But what about the seven years of bad credit scores that punish all defaulters?
JASON WELSH: I just feel that I can rebuild my credit score faster than I'm going to get $100,000 equity back in my house.
PAUL SOLMAN: And with lenders overwhelmed by so many foreclosures like Jason Welsh's and legal complexities galore, they're not going after his other assets, even though, in Florida, they could.
According to economist Luigi Zingales, strategic defaults now account for a third of all foreclosures in the U.S., a significant increase from just a year ago.
LUIGI ZINGALES, economist, University of Chicago Booth School of Business: People who know other people who walk away are more willing to walk away, so this points in the direction of a contagion.
PAUL SOLMAN: And that, says Zingales, could made a bad situation even worse.
LUIGI ZINGALES: But, if most of the people who are underwater walk away, then house prices will drop even more, and then that will induce more people to walk away. So, we can have sort of vicious circles in a lot of real estate markets, local real estate markets, that are going to be very dangerous.
PAUL SOLMAN: In Florida, where nearly half the mortgages are underwater, walking away is becoming, if not yet commonplace, at least nothing to be ashamed of.
JOSH BARTLETT: You watch the news, you talk to people in this area, it's -- it's not so bad now.
PAUL SOLMAN: Besides, says Bartlett, businesses do it all the time. In December, Morgan Stanley stopped making payments on five San Francisco office buildings worth half what they cost in 2007.
In January, developer Tishman Speyer gave two Manhattan apartment complexes on which it had borrowed $4.4 billion back to its creditors, including the California Teachers Pension Fund -- current market value, $1.8 billion.
And, in February, the Mortgage Bankers Association sold its Washington headquarters, on which it owed $75 million, for $41 million. Continued ownership, said the MBA, would be economically imprudent.
JOSH BARTLETT: Yes, I'm defaulting. Yes, I'm walking away. But I'm not going to keep running a business that is losing money as the days go on.
PAUL SOLMAN: So, a lot of folks aren't bothered by walking away, any more than they're embarrassed by having bought during the boom, the latest one, or, for that matter, the one that created this corner of Florida in the late '50s, when the Rosen brothers, a couple of salesmen from Baltimore, thought to develop Cape Coral.
Historian Gary Mormino:
GARY MORMINO, historian: They bulldozed everything over. They brought in an aggressive commissioned sales force. They brought tourists to Cape Coral by airplane. If you forgot your checkbook to make your down payment, they had blank checks from every bank in America. And Cape Coral was one of the great success stories.
NARRATOR: Cape Coral, with more miles of waterways than Venice, Italy, has become a legendary way of life on Florida's Gulf Coast.
MAN: I took one look and I said, that's it.
KEVIN JARRETT, realtor: This was my dream home.
PAUL SOLMAN: Half-a-century later, local realtor Kevin Jarrett said pretty much the same thing.
KEVIN JARRETT: I walked into the home, stood right here, put my hands on the counter, and looked out here, and I said, this is it. This is where I want to be. This is the dream.
PAUL SOLMAN: In 2006, Jarrett bought this home for nearly three-quarters-of-a-million dollars. But his dream of living on the water soon had him drowning in a nightmarish sea of debt.
KEVIN JARRETT: Soon after I bought the home, everything started crashing, and I didn't have the cash to pay it off like I expected to. So, I started paying the minimum, and then the below-minimum, which just kept putting -- adding on to the back end of the house.
PAUL SOLMAN: While his mortgage amount rose, the value of the house plunged, ultimately, by more 50 percent.
KEVIN JARRETT: I tried to keep everything going as long as I could, waiting for something to change, because everybody said that this market crash was going to last six months. Well, obviously not.
PAUL SOLMAN: Jarrett didn't walk so much as stumble away, broke. The bank moved to foreclose.
KEVIN JARRETT: During that process, I also lost my family. My -- I went through a divorce. My wife and my daughter now live up north.
I mean, I have literally lost everything. But, right now, I'm just trying to -- I'm just trying to do what's right, you know. And I'm in a bad spot, in a bad situation, but it has nothing to do with a business decision, where, you know, I'm walking away because my house is upside-down.
PAUL SOLMAN: Jarrett's foreclosure, in other words, was no strategic default. But had he had the option, he says, he wouldn't have gone that route.
KEVIN JARRETT: If you buy a car, it loses value as soon as you drive it off a lot, but you still keep making the payments for that vehicle.
I don't see the difference with the homes. What right do you have to say, well, I'm going to not pay, because now you're taking money from other people, because, oh, I want to take care of my family. Well, somewhere along the line, some ethics have to come into play, you know? And I just don't think it's right to do that.
PAUL SOLMAN: Neither, you probably won't be surprised to learn, does banker Bill Valenti.
BILL VALENTI, president & CEO, Florida Gulf Bank: When the value of the house was going up, you know, no one ever came to the bank and said to me, Bill, I have just sold my home, made $100,000. Here's $10,000 for the bank. Thanks for helping me, you know?
But yet, when the value of the home is going down, notwithstanding the fact that the borrower can repay the loan, they expect the bank to take the loss, or the person that bought that mortgage in the secondary market. In my opinion, it's just simply not fair.
PAUL SOLMAN: But most mortgages aren't owned by banks anymore, right? They're owned by investors, who own shares of pools of mortgages, and those investors are all over the world.
BILL VALENTI: And you and I may be investors in those pools by virtue of the fact that we have invested in a mutual fund or -- or some other investment vehicle.
So, some other human being, not an institution, is going to lose money as a result of their decision simply not to honor an obligation. And where does it end? How can a bank make a loan in the future if it runs the risk of knowing that the value of that property, if it goes down, the borrower has the right to leave it?
PAUL SOLMAN: So, what are you doing here at this point?
JOSH BARTLETT: Well, some people would call it squatting. But they could still have me, you know, to make payments, to refinance, to lower my principal. There's a million things that they could do, but are not willing to.
PAUL SOLMAN: But you have made out like a bandit.
JOSH BARTLETT: I have made out like a bandit, yes. But I'm willing to work with them. I'm willing to say, hey, look, we all made a mistake. We all got a little crazy in 2007.
PAUL SOLMAN: Three years later, it's a mistake Bartlett, like so many other Americans these days, is no longer willing to pay for.