Yes, it will -- as a default.

The important distinction here is that the homeowner was current on the loan when s/he walked into the bank with the keys and deed and said "I quit, here's the property, see ya."

So let me paint an example for you, using my favorite whipping boy of a state, California. Homes in California are over-priced by anywhere from 20 to 60%, based on average salaries in the region we're talking about.

Let's say that Johnny Doofus bought a house in 2006 for $800K. Don't laugh, that's not a high price in LA or the SF Bay area. $800K would get you a starter shack in the Silicon Valley area.

Let's say that Mr. & Mrs. Doofus are seeing houses just like theirs (eg, in the same development) that used to sell for $800 to $900K now selling for $600K. Let's also say that when they bought the house, they put down only, oh, 5% on a 2-year ARM loan.

Well, the ARM is going to reset upwards this year. The bank is looking at the house, and the current comparative valuation in the neighborhood, and the bank knows that regulation should require them to ask Mr/Mrs Doofus to pony up a whole lot more money to keep the "LTV" (Loan to Value) ratio under 100%. As it stand now, if the buyers put down 5% ($40K) and the comp is $600K, there's about 20% of the home's value that is now gone. The loan of $760K probably has paid down almost no principle and the LTV would be $800K - $40K = $760K / $600K a LTV of about 127%. The bank is crapping cinderblocks.

The Doofus family looks at this situation, the loan reset, the higher payments and says "You know, we've usually had to move every five years for Johnny's job... we might be having to move sooner if he gets laid off. We're never going to break even on this house. The higher payments for the mortgage are just good money after bad - because if we have to sell the house, we're going to have to come up with $160K or more if the value drops further. Let's go find an apartment, give the house back to the bank right now and cut our losses."

In many of the larger states, debt used to purchase a primary residence are "non-recourse loans" - meaning that once the bank has foreclosed on the liened asset, that's it, they're done. They can't come after the borrower and garnish his salary, or seize other non-house assets to make their loan whole. The homeowner defaults and that's the end of the deal.

And that's why people are just handing their houses over. Yes, there is a default on his credit report, but there isn't a foreclosure, and there's no bankruptcy (which there could well be if he loses his job). Given the situation, there's some very sound reasoning that leads people to say "Yes, it will be a bad mark on our credit, but the two other options that might happen in time are worse. Take the least worse of the three alternatives and cut our losses."

A lot of people are figuring this out in a hurry. The banks are seeing this trend pick up with speed that has major banks very, very worried - this is why you're seeing all these stupid (and boy, do I mean stupid) proposals coming out of DC to "keep people in their homes." But none of these proposals deals with the simple and irrevocable fact that people are upside down in their mortgages by major six-digit amounts of money in many of these over-priced areas of the country.