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Consumers Are Back to Paying Mortgages Before Credit Cards

In the peak of the mortgage crises, Americans were putting their credit card bills before their mortgage payments.  It sounds bizarre, and it certainly perplexed mortgage experts to think that people would put their access to credit before maintaining a roof over their heads.  However, studies show that this shift in activity had very strong correlation with home values.

Historically, homeowners exhibited a hierarchy when it came to bill pay: mortgages first, then car loan/credit card debt.  At the height of the mortgage crisis, the hierarchy shifted and shocked lenders.  During this time, homeowners typically paid mortgages last in their hierarchy, car loans first, and credit cards second.  The following graph depicts the credit union, TransUnion’s, statistics on borrowers 30 days delinquent on their payments over the years, broken up into percentages of delinquent payments.  The study included payment behaviors of 40 different sets of borrowers that were 30 days delinquent on their payments over 12 months:

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The graph above details that for the past decade, car loans never went over 2% delinquent, even at the peak of the financial crisis.  Meanwhile, mortgage delinquency spiked to almost 5%.  That is almost a full percentage higher than that of credit card debt delinquency, and almost 3% higher than that of car loan delinquency.  The trend held steady across all 50 states of the US.  The states that experienced greater home-price declines and higher unemployment rates were those that reflected the trend the most.

What the graph is really depicting is that when home values plunged significantly during the financial downturn, consumers chose to default on their mortgages rather than credit cards or car loans so that they had means to get to work and make every day payments, whereas the reality of foreclosure was a longer-term process that could take anywhere from 6 months to several years depending on the state of residence.  It highlights the idea that homeowners felt discouraged, as their mortgage loans were so high while their home values were so low and there was little or no equity in the homes.  The decrease in home values left millions of Americans underwater on their homes.

The city of Los Angeles experienced a bubble that further exhibits the correlation between decreased home value and increase default rate almost down to the textbook definition of what correlation means.  In statistics we have learned that correlation does not equal causation, however this depiction of correlation is so significant that it is difficult to ignore:

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The good news is that the housing market is currently demonstrating recovery, and this can be noted by the fact that credit card debt is now more likely to go delinquent than a mortgage payment.  This is reflected in the first graph just before December 2013.  The hierarchy finally returned to normal at the end of 2013, following two years of increasing home values.  The recovery is occurring slowly, but surely, however, the mortgage payment level has not yet returned to pre-crisis levels.

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