Study Challenges Assumptions About Payment Priorities

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MADISON, Wis. – Another longtime assumption related to consumers and their finances is being turned on its head.

In a new report, the Filene Research Institute said it has found consumers no longer pay their mortgages first, ahead of all other bills. The findings could affect the way risk is measured.

The report, “Consumer Credit Delinquencies: Why Do Some Choose Credits Cards over Mortgages?” shows that the stigma formerly associated with foreclosure is disappearing or, in locales hardest hit by the housing bust, completely gone. Researcher and Professor Ethan Cohen-Cole, of the Robert H. Smith School of Business at the University of Maryland, further found that the disappearing stigma is coupled with a rational consideration on the part of consumers to maintain liquidity in times of financial hardship.

Among the other findings:
* A large percentage of individuals choose delinquency on mortgages or credit cards, but not both. And a large fraction of that group chooses delinquency on mortgages while continuing payment on credit cards.
* Areas with large declines in home prices show stronger patterns of borrowers paying their cards first in an effort to protect liquidity.
* Debt patterns before delinquency are dramatically different than before bankruptcy.
* The tendency to protect credit cards is strongest among those with the least available credit, including the young, those with low credit scores, those with low income, and minority populations.


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