A growing number of borrowers are paying off their mortgage loans before their credit card debts, reversing a trend first seen in September 2008, according to a TransUnion study.
Many borrowers owed more on their homes than they were worth after the housing bubble burst and thus stopped making mortgage payments a priority. Yet, last September the delinquency rates began to shift to pre-recession norms: Mortgage delinquencies fell to 1.79 percent, while credit card delinquencies came in at 1.86 percent, TransUnion found.
Then, in December, the delinquency rate for mortgages fell to 1.71 percent (down from 3.32 percent in September 2008). The rate of credit card delinquencies was 1.83 percent in December (down from 3.29 percent in 2008).
"One of the biggest impacts of the Great Recession to the credit system was its influence on consumer payment patterns. As unemployment rose and home prices cratered, increasingly more consumers were faced with financial constraints and had to make difficult choicesand many chose to value their credit card relationships above their mortgages," said Ezra Becker, vice president of research and consulting for TransUnion and co-author of the study. "This was a measurable result of the economic environment, wherein many consumers were underwater on their mortgages and at the same time needed the liquidity afforded by credit cards to make ends meet."
One debt borrowers continue to prioritize over everything else is auto loans, mainly because they rely on their cars to get to work. In December, the delinquency rate on auto loans was 0.87 percent, compared with 1.65 percent in September 2008. The economic recovery, has eased loan payment problems of all kinds. Unemployment, at a February rate of 6.7 percent, is more than three percentage points lower than it was in September 2009 when mortgage delinquencies reached a peak of 4.92 percent, according to TransUnion's data.
To determine how much of an impact housing prices had on the rate of payment of credit cards versus mortgages, TransUnion looked at the delinquency spread between mortgages and credit cards over the past decade, and compared that spread to the Standard and Poors Case-Shiller 20-City Home Price Index (HPI). For example, if the 30-day credit card delinquency rate was 1.50 percent and the 30-day mortgage delinquency rate was 2.25 percent at a given point in time, then there would be a 0.75 percent spread between the two variables.
This was an especially enlightening part of the study, because we found that home price appreciation and depreciation can impact mortgage and credit card payment patterns quite differently, depending on whether consumers consider the environment normal, said Toni Guitart, co-author of the TransUnion study and director of research and consulting in TransUnions financial services business unit.
While we saw massive home value appreciation between 2003 and 2006, the spread between credit card delinquency and mortgage delinquency remained effectively the same; that is, the home value appreciation, while big, was expected and therefore not a driver of change," Guitart added. "However, once home values experienced major declines in 2007 and 2008, the delinquency spread narrowed to the point where more people were opting to pay their credit cards before their mortgages - something that was unimaginable just a few years prior.
