Homeowners Still Pay Credit Cards Before Mortgages


Despite a steadily improving economy and declining mortgage delinquency rates over the past year, more homeowners still are paying credit card bills before their monthly mortgage payment, a three year old practice than roughly parallels the foreclosure era and the emergence of “strategic defaults,” where mortgage holders walk away from their homes even though they can afford the mortgage payments.

However, the pattern may change soon.  TransUnion released a study yesterday that found for the first time since the deviation began, the percentage of consumers who are current on their credit cards and at least 30 days delinquent on their mortgage payments has declined.

“The latest data from our study show that the new payment hierarchy has persisted for longer than many industry experts initially believed, and provides evidence that consumers continue to adjust their payment behavior in response to their economic and personal financial environment,” said Sean Reardon, the author of the study and a consultant in TransUnion’s analytics and decisioning services business unit.

“We continue to see a significant divergence in the rates of consumers opting to pay their credit cards while going delinquent on their mortgages. Though we saw the first decline in the number of consumers who are delinquent on their mortgages and current on their credit cards in the most recent quarter, the percentage of people in this position still remains more than 72 percent higher than it was at the beginning of the Great Recession.”

The latest study is an update to a study released in 2010, which reviewed data up to Q3 2009. The newest study 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 third quarter of 2006 (Q3 2006) and the fourth quarter of 2010 (Q4 2010). The percentage of consumers current on their credit card payments and delinquent on their mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008 (Q1 2008). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the recession had concluded, this has not been the case.

The latest Transunion study found that the percentage of consumers who are delinquent on their mortgages and current on their credit cards rose to as high as 7.4 percent in Q3 2010 from 4.3 percent in Q1 2008. However, the rage fell to 7.24 percent in Q4 2010 to 7.24 percent and the percentage of consumers who are delinquent on their credit cards and current on their mortgages decreased to its lowest level ever — 3.03 percent — in Q4 2010.

“Home value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Consumer preferences are evolving in this new post-recession environment, and TransUnion’s payment hierarchy study provides a glimpse into how consumers are prioritizing their payments.”

Of the consumers who defaulted in Q4 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.

Strategic defaults, which first became widely discussed in 2008, account for a small percentage of total defaults, with some exceptions.  Last month the Nevada Association of Realtors reported that nearly one quarter of people losing their homes to foreclosure in Las Vegas walked away even though they could afford their mortgages.

The biggest percentage of those who walked away, at more than 30 percent, were 65 and older, according to the survey of more than 500 people. Participants between the ages of 18 to 34 comprised about 25 percent of walkaways, along with those ages 45 to 54.  Nearly half of those who walked away had a household income of at least $4,000 a month. More than 20 percent had more than $8,000 a month in income.

However, a recent national survey by Credit.com found that strategic defaults remain unpopular among mortgage holders. More than 83 percent of respondents say they were either ‘not very’ or ‘not at all’ likely to do a strategic default.

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