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Consumers Once More Paying Mortgages Before Credit Card Debt


Consumers Once More Paying Mortgages Before Credit Card Debt

debt2Consumers are once again putting their home loans before credit cards when paying bills, reversing a pattern that developed after the economic downturn, the Wall Street Journal reported.

As home values fell during the crisis, Americans began to default on mortgages while keeping up credit card payments, according to TransUnion research. This reversed a long-standing hierarchy in which mortgage lenders believed home loans would be paid before anything else.

The credit reporting company found that the payment hierarchy returned to normal sometime at the end of 2013 after two years of rising home prices.

“People are paying their mortgages again ahead of their bank card,” said Steven Chaouki, financial services executive at TransUnion.

The research found a strong link between home prices and the payment behavior of Americans during the downturn after examining 40 different types of borrowers in which consumers who had been current on a credit card, home loan, or car loan had defaulted any time in the last year.

The trend was found to hold steady across the United States. Areas that had greater home price drops and higher unemployment rates saw more consumers miss payments on home loans while staying current on credit card accounts.

In Nevada, where home prices fell 57% between 2006 and 2009 at the height of the housing crisis, over 15% of consumers were delinquent on home loans but continued to stay current on credit cards.

In Chicago, which had less severe home price declines but a slower recovery, the payment spread has not quite reverted back to normal, while Dallas had less severe home price declines and a payment hierarchy that inverted briefly.

“You rarely see anything like this outside of a textbook where you’re trying to teach people how a correlation works,” said Chaouki in regards to the strong relationship between home values and payment preferences.

According to researchers, borrowers were more likely to default on their home loan as they had lost all or most of the equity in their homes while foreclosure was anything but immediate, taking years in many cases. Missing a credit card payment, however, would have immediate consequences and deprive the borrower of a source of liquidity. The same is true for missing a car loan payment, as the borrower could be sacrificing the means to get to work.

The data suggests that as home prices rebound across the country, Americans may begin to act in a more predictable fashion and lenders may have more confidence in extending new credit.


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