Americans across the nation are not only underwater in their homes, but opting to pay credit card payments over their monthly mortgage. Major credit reporting agency TransUnion reported that last fall, over 10 percent of California residents were paying credit card bills instead of their mortgage payments.
Home Equity Lines of Credit
According to recent FDIC figures, home equity lines of credit, instead of primary mortgage payments, have been the target of pay downs by homeowners using the credit to pay other life maintenance expenses.
Consumer economics senior director for Moody’s Economy.com, Scott Hoyt, noted that history has proven that the mortgage is the first thing put on the back burner when consumers are strapped for cash. That is the response evoked by the bursting of the U.S. housing bubble, resulting in a shift in consumer bill paying priorities.
When the nation is flourishing, consumers consider the mortgage payment as top priority, car loans are next, then credit card payments and all other bills follow.
With all the economists touting that the recession has likely ended, homeowners should be reverting back to the traditional payment priority hierarchy. On the contrary, TransUnion’s study showed that 6.6 percent of consumers in the latter half of 2009 were current on credit card payments, but late on their mortgages.
That’s a stark contrast from the 4.3 percent noted in January 2008 on the heels of the real estate collapse. To put that into perspective, there are approximately 75 million homeowners, 4.95 million of which are currently behind on their mortgage payments, but making on-time payments to their credit card companies. That’s a 1.725 million increase from the 3.225 million reported in early 2008.
Higher Unemployment Numbers
Although higher unemployment numbers are a contributor to the shift in consumer conduct, other factors are also involved. Based on industry experts, borrowers find it more realistic to pay several smaller payments for credit card and other debt, rather than making one larger, more substantial, payment to a mortgage company.
And, still others have learned that they won’t be evicted for some time after they stop paying on their home loans – up to 18 months in some states like Michigan and Florida. Typically, however, stressed borrowers maintain access to credit to ensure they can cover life-sustaining expenses like food, gasoline and car repairs. Falling home values are also a big contributor to current consumer behavior.
Mortgage payments used to be “sacrosanct,” says HSH.com’s Keith Gumbinger, but living in today’s society is difficult without the use of credit cards.
According to TransUnion’s director of consulting and strategy of the company’s financial services unit, Ezra Becker, the reasoning regarding mortgage payments changed in recent years with the lowering of lending standards and ease of obtaining a home loan. Keeping credit cards is important to consumers now due to stricter credit-letting standards, and banks have made an about face from past practices and are now making it tougher to access secured credit and home equity loans.
A former Freddie Mac chief credit officer, Edward Pinto, noted the disparity in the immediate penalty involved in not making credit card payments versus the longer term result of not paying a mortgage. It takes much longer now to be evicted from a default on a home loan than it does to have your credit card shut down for non-payment. The immediate access to credit is a motivator.
Loan Modification Program
Recent participants in the government’s 2009 Second Lien Modification Program, falling under the Making Home Affordable (MHA) program, include the four largest banking institutions in the U.S. Bank of America, Citigroup, JPMorgan Chase and Wells Fargo all agreed to take part in assisting homeowners in modifying their second mortgages.
Lender Processing Services (LPS) representative, Senior Vice President Shelley Leonard of consumer lender strategy noted that banks want the best solution for the borrower and that first and second mortgages will need to be addressed in order to accomplish that. Collaboration is part of the approach taken by loan servicers when two mortgages are involved. The strategy is intended to minimize losses for everyone involved in the loan. LPS is a major provider of mortgage information for the financial services industry.
In attempts to mitigate loss, other banks are trying preventive strategies for homeowners perceived to be at risk of default. Adjustable rate mortgages (ARMs) perched to reset and large mortgage holders were part of a 2007 financial review initiated by Regions Financial (RF) based in Birmingham, Alabama. At a 2009 year-end portfolio rate of only 1.95 percent foreclosures compared to more than twice that for the national average, it appears the company met with some success, says Barb Godin, a RF consumer credit executive.
Industry experts believe that, in spite of current consumer behavior, homeowners will eventually return to placing the priority of the mortgage payment above all others. Moody’s Hoyt says that will only occur, however, when the economy improves and home prices begin to rise.