When it comes to choosing between making a mortgage payment and paying a credit card bill, cash-strapped U.S. consumers are increasingly picking the latter, recent research says.
This could help the performance of credit card-backed bonds, even as it further dents that of residential mortgage-backed securities.
Historically, people paid their mortgages first; auto loans next, so they could get to work, and then their credit card debt. But according to a report from TransUnion LLC, "the housing bust, the declining social stigma of default and the increasing utility of cards in day-to-day life" has "increasingly resulted in cards leap-frogging the mortgage in the consumer's payments waterfall."
Serious delinquencies in prime jumbo loans have grown. The share of these loans at least 60 days in arrears rose to 9.6% in January, from 9.2% in December, according to data from Fitch Ratings. Among subprime borrowers, delinquency was closer to 50%.
The share of consumers current on their card payments but delinquent on their mortgages rose to 6.6% in last year's third quarter, from 4.3% in the first quarter of 2008, according to the TransUnion report. However, the share of consumers current on their mortgages but delinquent on their credit cards fell to 3.6%, from 4.1%, during the same period.
Those behind on their payments are generally highly leveraged borrowers, said Michael Youngblood, a principal at Five Bridges Advisors LLC, a boutique valuation firm that specializes in residential mortgage-backed securities.
This population segment is also the one that must rank payments in order of priority. "Borrowers are becoming more rational in that they have started to think about what they need to live in this recession," Youngblood said. "If you lose your house, you can rent or move in with family, but without your credit card, it is very difficult to live your daily life."