'You Cannot Buy Groceries with Your House'

One of the many (dubious) assumptions that Wall Street rocket scientists made before the housing and credit bubbles burst centered on what mortgagors would do if the economy hit a "speed bump" (back then, of course, the conventional wisdom was that severe downturns had been eliminated by expert policymaking, reams of academic research, and the wisdom of the ages).

Generally speaking, they believed that homeowners who ran into financial difficulties would behave in the same way that others had before them -- that is, they would make sure the monthly mortgage bill was among the first to be paid.

Well, as with the notion that house prices never go down, this theory turned out to be wide of the mark, as Reuters reports in "More Consumers Pay Credit Card Before Mortgage: Study":

More and more consumers are giving greater priority to paying credit card debt than making a mortgage payment, showing increased financial duress, according to a report released on Wednesday.

As the economy climbs out of the worst recession in decades and unemployment remains high, financial strains have forced consumers to prioritize monthly debt payments in order to maximize cash flow.

The percentage of consumers delinquent on mortgages, but current on credit cards rose to 6.6 percent in the third quarter of 2009 from 6.3 percent in the previous quarter and 4.9 percent in the same quarter a year earlier, a new study developed by TransUnion showed.

The trend first emerged in the first quarter of 2008 when it was at 4.3 percent, Chicago-based TransUnion said.

Less emphasis on mortgage payments could portend higher delinquency rates and perhaps even more foreclosures. That does not bode well for the hard-hit housing market, which remains highly vulnerable to setbacks.

"This goes against conventional wisdom and that has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit, said in an interview.

By making a minimum payment on a credit card before a full mortgage payment it gives consumers monetary leeway to go about their daily activities, especially if they have lost a job.

"You cannot buy groceries with your house," he said.

The study, obtained exclusively by Reuters prior to its scheduled release, was conducted on consumers that had at least one credit card and one mortgage, and examined 30-day credit card and mortgage delinquency data between the second quarter of 2008 and the third quarter of 2009.

Conversely, the percentage of consumers who were delinquent on their credit cards and current on their mortgages decreased to 3.6 percent in the third quarter of 2009 from 4.1 percent in the first quarter of 2008.

"The 'flip' in payment hierarchy in the lowest scoring segment was evident earlier during the fourth quarter of 2007, compared to the first quarter of 2008 for the total market," Reardon said.

The delinquency rate for consumers with the lowest credit scores who were delinquent on their mortgages, but current on credit cards during fourth quarter of 2007 was 19.1 percent, and rose to 29 percent in the third quarter of 2009.

In a trend similar to that of the total market, the percentage of consumers delinquent on credit cards, but current on mortgages decreased from 18.1 percent in the first quarter of 2008 to 14.5 percent in the third quarter.

CONSUMER CAUGHT IN CONUNDRUM

"The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market came together and redefined how consumers are managing their finances and meeting or not meeting their credit obligations," Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit, said in the interview.

The analysis shows changing consumer preferences, he said.

"The financial services industry must recognize and adjust to the payment hierarchy shift," he said.

In California, the percentage of consumers delinquent on mortgages, but current on their credit cards increased from 3.5 percent in the third quarter of 2007 to 10.2 percent in the third quarter of 2009. In Florida, this same variable increased from 5.1 percent to 12.4 percent.

In this same time frame, the United States increased from 4.0 percent to 6.6 percent.

In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in the third quarter of 2007 to 2.7 percent in the third quarter of 2009. In Florida, this variable declined from 5.0 percent to 3.9 percent, the report showed.

Comments

[Martin, the Netherlands]

I understand that after you stop paying your mortgage, it takes several months before you actually lose your house. When you stop paying your credit card, I would expect the sanction to happen almost immediately. I think it's as simple as that.

[austincompany]

I think also there is a mental numbers game going on. Would you rather not pay the ONE mortgage or the SEVEN (or more) credit cards? Additionally, (though I do not know this for a fact), it seems your FICO score would be less affected by ONE foreclosure vs. SEVEN or more credit card charge-offs. Additionally, people do not view home ownership as sacred anymore - it's simply a place to live. And you can live anywhere but you cannot live without those credit cards.

[CaitlinO]

With 10% of home mortgages underwater right now, what's the point of scraping to make the payment? If you're in a mortgage whose balance is higher than your home value, you're a defacto renter, anyway, and you're paying more for rent than you would have to spend to lease an identical house down the street.

It looks to me like a perfectly rational response to the totally hosed up housing sector that bankster greed created.

[austincompany]

Though I agree with your walking away principal, I disagree somewhat with the greedy bankster mention. Banks are usually public companies that are in the business to make money. The issuance of mortgages (all kinds) was a way for them to do just this. And none of it was against the law. Now you may make a moral argument that making money in this way was "greedy", but again, my response would be that banks are NOT non-profit organizations that have everyone's best interest at heart. Who they do look out for are the Banks employees and shareholders - just as it should be.

In my opinion, it was very low interest rates, along with the complete lack of financial regulation of mortgages, consumer greed (let's buy a house that we can't afford because we can always sell it later) and the real estate "machine" (Realtors, home builders, independent mortgage brokers) that caused the bulk of the problem to led us into the mess we are in now.

[just.a.guy]

A predictable outgrowth of:

1) banks slow-rolling foreclosures to avoid having to mark mortgages to reality and reveal their true insolvency.

2) consumers realizing that this is happening, and knowing that if they stop paying the mortgage the default/foreclosure process is a long one. Here is a moral hazard -- by not enforcing foreclosures, the banks have invited mortgagees into a game of default chicken.

3) consumers further realizing that dollars into the house are dead money if the house is underwater. homes as a source of credit are dead, whereas dollars into the credit card preserve access to more credit.

And this is all directly attributable to government meddling via TARP, TALF, TLGP, and MBS purchases. Extend and pretend. And pray.

[signalfire]

What people are doing is taking the mortgage payment money and using it to pay down the horrific new interest rates on the credit cards. The extra money adds up fast; then after a month or three, you send the mortgage company a few bucks. That resets the 'default' and makes them happy. Then you revert back and send a few months worth of mortgage money to the CC companies. Once the CC crap is paid off, you can go back to the house payment and nothing's different, maybe a few small 'late payment' fees. But the CC's have a much higher interest rate. Preserves the credit rating and the house and you can finally get those damn cards paid off.

[JB]

Unfortunately, while I agree with the strategy in a vacuum, people will end up shocked when their credit cards have their limit cut continually until they're wiped out and canceled completely. A passive-aggressive bank will decline transactions and lower the limit to the current balance with each payment. It's a good thing to pay the card from a debt perspective, but it turns them into just another dead weight forcing people into bankruptcy rather than a rational last-ditch source of extra funds. While it will become much more difficult for the banks to do that after this month's regulations go into effect, they won't stop.

The only way to beat the death spiral when the lenders won't work with you, without losing your house, is to declare bankruptcy - and even that's a gamble, but not as much as just hoping you won't be the next one foreclosed on. Let the law force lenders to restructure loans or absolve debt. Once in bankruptcy they cannot foreclose until the bankruptcy is discharged, at least.