At some point, NOT walking away from your mortgage is stupid. Suppose you buy a condo in Del Mar or La Jolla for 500k$ w/ 5% down and an interest-only loan. With California foreclosure laws, you can look at this like a put option with a 475k$ strike. If the price of the units in the building drops to say, 400k$, you have two options:
1) Keep paying on your I/O mortgage on the full 475k$ amount of your loan.
2) Let the lender foreclose your unit and sell it for 400k$. You realize 75k$ in debt-forgiveness income (25k$ in taxes) and have your credit rating ruined. Once the smoke has cleared (or using a related party, or if you have enough bank to pay cash), you buy the unit nextdoor for 400k$.
If the damage to your credit rating is worth less than 50k$, option 2) is the better choice.
