If we’ve learned one thing from the housing downturn, it’s that making the monthly mortgage payment is no longer a sacred concept in many American households. In recent years, when facing financial pressure, homeowners have been more likely to let the mortgage slide before they would fall behind on their credit card bills, researchers have found.
But it turns out that the mortgage is even less sacred than we thought: When times are tight, consumers put paying for their cars first. Then the credit cards will be paid.
The once-mighty mortgage has slipped to No. 3.
Ezra Becker, vice president of research and consulting at TransUnion’s financial services business unit, discussed why mortgages have lost their place in line.
I grew up thinking that falling behind on your mortgage was to be avoided at all costs. Am I mistaken? Isn’t that how the consumer mind-set has run, historically?
You’re not alone when you say that the prevailing attitude has long been you always pay your mortgage first, no matter what. If you were under financial stress, you would pay your mortgage first, then your credit cards, then your car payment. That’s the traditional payment hierarchy. But until the latest recession started, nobody even called it the “traditional payment hierarchy”; it was just “the payment hierarchy.”
What did you study to conclude that there’s been a change in attitudes about this hierarchy?
One of the things we noticed at the beginning of the recession was that delinquency rates on mortgages were skyrocketing, but they were controlled in the credit card space. We knew this was weird. If the traditional payment hierarchy were holding true, credit card delinquencies also would have skyrocketed too.
So we studied the data in 2010 and later updated it, concluding that credit cards had, indeed, become the top priority. But we didn’t include car payments in those studies, so we did a second update, studying 4 million people who had a mortgage and at least one credit card account and one auto loan.
We found that in 2011, consumers were likely to pay their auto loans before their credit cards, and then their mortgages. It was true in all 50 states and the District of Columbia and across different risk tiers, such as prime versus subprime. It was illuminating to see that credit cards aren’t the most important credit to people; it’s auto loans.
For consumers who had all three types of credit in 2011, when they became delinquent in any of those categories, 9.5% who were delinquent on an auto loan were current on their credit cards and mortgages. And 17.3% who were delinquent on their credit cards were still up to date on their mortgages and car loans. But a far larger number, 39.1%, who were delinquent on their mortgages stayed current on their credit cards and car loans.
Why have cars taken the top priority?
We believe that it’s primarily because consumers need their cars to get to work or to seek employment. Being able to seek employment is particularly relevant because of how long people have been out of work.
Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can’t use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you.
But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren’t involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you’re looking at 10 to 20 months before you’ll be evicted.
And you have to look at the idea of equity. In the “traditional” hierarchy, you’d say that people valued their homes above all else. But this is slightly inaccurate: They valued their equity above all else. When equity evaporates for consumers, the home is not so important.
Is this a permanent change in our attitudes?
We don’t think so. We think that when home values become stable, when unemployment returns to healthier levels, when card lenders are offering or extending credit more widely across the spectrum, we would expect those traditional forces to return to normal.
It’s not that consumers have become irrational; they’re actually rational. This question of which bill to pay first is not for people who are gainfully employed. They can and do meet their debt service obligations. It comes into play when they’re financially stressed and thinking, “I don’t have enough to pay all my debts this month. What am I not going to pay?” It’s where the rubber meets the road.
But we think it’s going to be a few years yet. Our internal forecast for housing is that it won’t be fully stabilized until 2017, barring a major change in the environment. It’s going to be another five years before we’ll revert to the traditional format.
Umberger writes for the Chicago Tribune.