Mortgages Being made with Credit Cards

"New" Payment Hierarchy May Be Here to Stay

A new study developed by TransUnion confirms that the "new" payment hierarchy -- where consumers pay their credit cards prior to their mortgages -- is continuing, with the trend occurring more readily than ever before.

"Conventional wisdom has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages," said Sean Reardon, the author of the study and a consultant in TransUnion's analytics and decisioning services business unit. "However, a recent TransUnion analysis has found that increasingly more consumers are paying their credit cards before making mortgage payments. This analysis reaffirms the results of a previous TransUnion study that examined data between the third quarter of 2006 and the first quarter of 2008."

The percentage of consumers current on credit cards and delinquent on mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008. This "flip" is representative of the change in the conventional wisdom around the payment hierarchy, or which debt obligations consumers would choose to pay first.

The latest study, conducted on consumers that had at least one credit card and one mortgage, examined 30-day credit card and mortgage delinquency data between the second quarter of 2008 (Q2/2008) and the third quarter of 2009 (Q3/2009). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once we had passed through the worst of the recession -- that has not, in fact, been the case. To the contrary, this study found that the hierarchy reversal has become even more widespread, with the percentage of consumers who are delinquent on their mortgages and current on their credit cards rising to 6.6 percent in Q3/2009 (from 4.3 percent in Q1/2008). Conversely, the percentage of consumers who are delinquent on their credit cards and current on their mortgages has decreased to 3.6 percent in Q3/2009 (from 4.1 percent in Q1/2008).

"This same trend is evident within the lowest scoring risk segment," added Reardon. "Moreover, it should be noted that the 'flip' in payment hierarchy in the lowest scoring segment was evident earlier during Q4/2007, compared to Q1/2008 for the total market."

The study found that the magnitude of delinquency in the lowest scoring segment is significantly higher than that of the total market. The delinquency rate for consumers in this segment who were delinquent on their mortgages but current on their credit cards during Q4/2007 was 19.1 percent, and rose to 29 percent in Q3/2009. In a trend similar to that of the total market, the percentage of consumers delinquent on their credit cards but current on their mortgages decreased from 18.1 percent in Q1/2008 to 14.5 percent in Q3/2009.

The payment hierarchy shifts are even more pronounced in states such as California and Florida that experienced a more severe housing bubble effect. Within California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in Q3/2007 to 10.2 percent in Q3/2009 (a 191 percent increase). In Florida, this same variable increased from 5.1 percent in Q3/2007 to 12.4 percent in Q3/2009 (a 143 percent increase). In this same timeframe, the United States experienced a 68 percent increase (from 4.0 percent in Q3/2007 to 6.6 percent in Q3/2009).

In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in Q3/2007 to 2.7 percent in Q3/2009. In Florida, this variable declined from 5.0 percent in Q3/2007 to 3.9 percent in Q3/2009.

"The implosion of the mortgage industry over the last 24 months, the resetting of adjustable-rate mortgages and the weak job market have all come together to redefine how consumers are managing their finances and meeting (or not meeting) their credit obligations," said Ezra Becker, director of consulting and strategy in TransUnion's financial services business unit. "The insight gained through this analysis reveals a lot about changing consumer preferences. The financial services industry must recognize and adjust to the payment hierarchy shift with judicious modifications to business models, new assessments of specific areas of risk, and by strategic revisions to acquisition and account management strategies."

The source of the underlying data used for this analysis was TransUnion's Trend Data, a proprietary historical database consisting of 27 million anonymous consumer records randomly sampled every quarter from TransUnion's national consumer credit database. Using TransUnion's standard definitions of credit card and mortgage trades, TransUnion was able to create and evaluate the custom attributes that are the basis of this study.