MIAMI-The number of consumers behind on their mortgage payments but current on their credit cards continues to rise, while bankruptcies are also set to increase.
"It's not new news that someone would walk away from their homes when they are upside down," Barrett Burns, President/CEO of VantageScore Solutions said at Sourcemedia's recent National Collections & Credit Risk Conference here. "But for the first time there is a dramatic shift in payment hierarchies."
As of December 2009, about 70% of all first mortgages are clean and current, compared to more than 84% just three years earlier. The number of consumers with current credit card accounts but delinquent mortgages jumped by more than 50% over that same time period.
The national housing crisis and rising unemployment have discouraged homeowners from paying their mortgages when the value of their homes continues to fall in favor of keeping their credit cards in good standing, in order to pay for daily living expenses. Lenders that are overly reliant on credit score to determine risk must be sure they are adapting to the changing credit conditions, Burns noted.
But while this phenomenon is growing, not everyone is convinced that it will become a widespread and permanent behavior.
"A lot of them are becoming more savvy about their credit scores, how to manage their credit," said Jason Brock, SVP at Utah-based Zions Bancorporation. "Obviously the behavior has changed in terms of paying down debt. A lot of people have switched from paying down mortgages to credit cards to maintain that relationship. I think a lot of those trends will reverse once property values stabilize and people see more value in investing in their residence, they'll switch back."
Bankruptcies have also increased throughout the recession, but one expert said that the real spike will occur when the jobless rate begins falling. "[When] we have a lot of new job growth you'll see the bankruptcy rate go up, because when people get those new jobs they'll want to get rid of their debt," predicted Chris Lundquist, president and CEO of Lundquist Consulting.
The West Coast and mountain regions are experiencing the highest bankruptcy rates nationwide, with one-in-80 households filing bankruptcies, while the Midwest and Northeast have fared better with about one in 121 households filing. Joint bankruptcies are also up, to 34% today from 32% historically-unusual because many bankruptcies are caused by divorce, separation or spousal death.
"We have a very different consumer and a very different perspective on who is filing bankruptcy today," Lundquist said. "You're seeing people in bankruptcy today because of their home problems."
With higher bankruptcy rates, creditors must implement multiple strategies to deal with this segment of their portfolios. Lundquist suggested financial institutions either build in-house capabilities or begin a relationship with an appropriate vendor instead of being locked in a position where they have to sell in a market with excessive supply and depressed prices.
