The complex morality of a sub-prime mortgage world

I have really been enjoying the reading over at The Consumerist over the last few weeks. It is a blog dedicated to consumer issues like bad customer service, extended warranties, and the like. Today, it has up an interesting article on the complex decisions facing a sub-prime mortgage home-owner as they face the choice of paying the mortgage and seeing the money lost as the house value drops, or not paying the mortgage and saving the money for themselves (knowing foreclosure is inevitable).

Sinclair: We went through months of being skinflints, because we knew that we were going into the red, so we didn't buy anything. All the sudden, we had a bank full of money and we're living rent-free, but we know that's not really our money.

Vigeland: How does that feel?

Esmeralda Sinclair: Great! Like he said, we were so tight with money...

Dan: It does feel great, because all the sudden, we feel like we have a little margin now where we can go out to dinner, get a babysitter...

Vigeland: But you're not paying your mortgage. You're not paying the biggest obligation you have. How does that feel good?

Esmeralda: We already went through the guilt. This is really what we need to do, not what we wanted to do, but what we need to do.

These are the situations where morality and law are more interesting. Are these people better off paying their mortgage in order to honor their contract, or NOT paying in order to have equity for their lives and children when their time runs out? Or is their bank better off declaring some kind of "mortgage payment holiday" in hopes that eventually they will come around and start paying again? Or at this point, have things gone too far to come back?