Americans are reversing an unusual pattern that had developed after the housing bust: They are putting their mortgages ahead of their credit cards when they pay the bills. Lenders expected mortgages to be paid first when home values plunged during the downturn, but consumers began to default on their mortgages while continuing to make credit card payments.
Making sense of the story
- Research reportedly found that in all 50 states, those who experienced greater home-price declines and higher unemployment rates saw more borrowers miss payments on mortgages while staying current on their credit cards.
- While people are now paying their mortgages again ahead of their bank card, Trans Union posts that the payment relationship hasn’t returned entirely to pre-crisis levels.
- The reversal in consumer behavior, i.e. normal payment hierarchy, returned at the end of last year, following around two years of rising home values.
- Notably, before, during and after the crisis, Americans are most likely to make their car payments first.
- As an example, in Los Angeles, where home prices declined 42 percent from 2006 through 2011, the spread between mortgage and credit-card delinquencies widened sharply. Home prices rebounded strongly beginning in 2012, and the payment spread, which was inverted for six years, has nearly disappeared.
- Borrowers were more willing to default on their mortgages because they’d lost all of the equity in their homes and foreclosure wasn’t immediate.
- As home prices rise, borrowers may act more predictably going forward, which could give lenders greater confidence to extend credit.