PhilMur's thoughts on biz/tech/money/life

This recent article highlighted the irony in the credit crisis and the home mortgage crisis.  There has been almost endless talk over the past couple of years about mortgage re-works, government assistance to struggling homeowners, and a variety of efforts to reduce foreclosures.

Not that any of these things are bad in and of themselves, but I think it may have planted some ideas in the minds of mortgage-burdened homeowners that were likely not intended.

As explained by this article in the San Francisco Business Times, a TransUnion study found that the percentage of homeowners deliquent on their mortgages but were current on credit card obligations increased, while the percentage of individuals in the opposite scenario (current on their mortgages but delinquent on credit card obligations) increased.

Contrary to the conventional wisdom that individuals will tend to favor secured loans/credit (such as debt secured by a home or a car) over unsecured debt (credit card debt, for example) when it comes to staying current on payments. But this new evidence suggests that the trend is reversing.

Why? There are a few reasons this could be occuring:

1. The speed of creditor retribution is much slower and much less dramatic with a mortgage than with a credit card.  A deliquent mortgage payment may result in phone calls, but the ultimate penalty (foreclosure and the eviction that comes with it) is literally months away from the first missed payment, and with banks eager to avoid foreclosure in many cases, homeowners know they will likely have many opportunities to make things right.  On the other hand, credit card companies quickly hit cardholders with late fees for missed payments, not to mention the ongoing interest charges on their balance, often which are at a very high percentage.
2. Credit cards are “helpful” to meet ongoing living expenses.  If their ability to spend via credit cards is cut off, desperate consumers may be unable to buy groceries or put gas in their vehicles.  It makes a lot of sense in the short-term to make a minimum credit card payment and keep the card open for ongoing spending if they are struggling to meet base-level needs such as food for the family.
3. Homeowners deliquent on their mortgages are beginning to “call the bluff” of the banks.  As mentioned a moment ago, all of the press coverage on the issue of mortgages gone bad and looming foreclosures may have made many homeowners disbelieving that their bank will ever actually foreclose on THEM.
4. Homeowners have lost hope.  With home price depreciation not reversing any time soon in many markets, recent owners of highly-leveraged homes don’t see any path to getting into positive equity territory any time soon.  It could be argued that many homeowners consider foreclosure inevitable, so why continue to make payments?

As much as I loathe and discourage consumer (credit card) debt, vehicle debt, and highly-leveraged home ownership, the trend indicated by the TransUnion study is not surprising.

Creditors and consumers alike would be wise to think through the implications of this trend on their current and future practices.