Friday, April 1, 2011

Consumers Continue Trend of Paying Credit Cards Before Mortgages

This was a topic we explored quite a bit in 2008 and 2009 but I have not touched on it in a long time.  (it's been so long I cannot find the old posts in the archives)  In a complete change of ethos from how defaulting used to be done in the 'good ole days', the practice of paying credit cards ahead of mortgages not only has continued, but has increased from 2008-2009 levels.  This should come to no surprise as we brought an army of "home owners" into the country who put nothing down into "their" house with these new fangled 'innovative' mortgages, hence had no skin to lose by not paying the mortgage.  Effectively we were giving away homes under terms even cheaper (out of pocket) that renting... which requires a security deposit at least.  (keep in mind many of our 'innovative' mortgages in the bubble years rolled closing costs into the mortgage balance)

Of course that was the situation in the earlier days of the crisis - now as we have moved in 2010 and 2011, we have armies of strategic defaultors plus those who simply cannot pay due to loss of jobs or taking new jobs with substantially lower pay levels.  Therefore, paying for the item that provides immediate cash flow (credit card) versus the sunk cost, illiquid asset has become a no brainer when choosing between the two.   This is a world of difference versus the pre "innovative mortgage" era, when the fact people actually had to put a substantial amount of money down on their home, would create a focus on saving it above all else during financial hardship.  Just another unintended consequence of a system gone dysfunctional.

The last point is one never cited in these stories - when you don't pay your mortgage, it's easy to pay down/off the credit card balance each month with the extra money ....

Via AP:
  • It's not just mortgages that are upside down. People are staying current with their credit card payments even when they are behind on their mortgage, continuing a trend first seen three years ago.  Data now shows that the flip was even more pronounced at the end of 2010, long after industry experts expected patterns to return to normal.
  • Among consumers who had at least one credit card and a mortgage, 7.24 percent were 30 days late on mortgage payments but current on their card payments at the end of 2010, credit reporting agency TransUnion said. 
  • That compared with 4.3 percent in the first quarter of 2008, when the change was first seen on a national basis.
  • In contrast, 3.03 percent of consumers with both forms of debt were at least 30 days late on credit cards, but current on their mortgage in the 2010 fourth quarter, compared with 4.1 percent in early 2008.
  • "As long as housing problems persist and unemployment is high, things are likely to stay flipped," said Sean Reardon, a consultant for TransUnion who produced the study by analyzing data from consumer credit reports.
  • Not surprisingly, the situation is most pronounced in two states hit hardest by the housing crisis, Florida and California. Both states saw the flip earlier that the rest of the country -- in the third quarter of 2007.
  • The persistence of the reversal shows that consumers don't want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. "You can't buy groceries with your house," Reardon said.

If the latest data (Q4 2010) is any indication, this trend is not changing anytime soon - indeed I could see this continuing for many more years into the future, as housing enters the 2nd leg of a double dip. 
  • Of the consumers who defaulted in the last three months of 2010, 52 percent defaulted on their mortgages while keeping their credit cards current, and 22 percent defaulted on credit cards while keeping their mortgages current.

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