More and more people are paying their credit cards instead of their mortgages. Capital One says that 2/3 of their customers who are 90 days or more delinquent on their mortgages are still current on their credit cards. This is a major paradigm shift. For the first time in American history, consumers are defaulting on their mortgage but staying current on their car payment and revolving accounts. Why the change in consumer behavior?
If you go back 50 years, it was terribly embarrassing to go through foreclosure. It’s still difficult, but people aren’t as likely to know their neighbors anymore. People aren’t as much a part of their communities as they used to be. With people moving every few years combined with job transfers, folks are transient. People make friends through work, hobbies, church and civic groups. They are no longer dependent upon their neighbors as their main source of friendship. If you barely know the people on your block, it’s a lot easier to acquiesce to foreclosure.
But why continue paying revolving debt if your credit score is going to tank anyway due to foreclosure? With no home equity to tap and much of American wealth in 401k plans, credit cards are the new emergency fund. If a person has gone through foreclosure, there is no more home equity to access, obviously. The American savings rate hovers around zero. To live, people need access to cash, and credit cards fill that need. In the old days, when people went under, they went all the way under. We have entered a new era in consumer behavior, with people defaulting on their mortgages but continuing to pay their revolving debt.
Wade Young is a Denver, CO mortgage broker.
If this is true our culture is circling the toilet much quicker than I had realized. It’s important to have the Nuvi GPS, the current wardrobe and to eat out 3 times a week…even if you can’t afford it? Are these credit cards being used for bread and milk? (I doubt it.)
Focus people. Focus. I don’t care what your best friend from high school just bought. I love what Dave Ramsey says on this: Act your wage.
Act your wage indeed. I think that part of it is hopelessness, people don’t figure that they can ever get the house caught up, but they want to sustain their credit cards. Who knows.
I know someone with an 1900/month house payment. That house was foreclosed. They attended the sherrif’s sale, and offered to stay as tenants…for $1200/month.
They got their wish.
Heck, I know some guys in Florida who stopped making payments more than a year ago, and the bank still hasn’t got to them. They also say they’re not the only ones who’re doing the same thing in their neighbourhood.
Yuck. These people are suckers and dirtbags. Their credit card companies they try so hard to keep happy will probably raise their interest rate to about 25% once the foreclosure goes through and their credit ratings tank. I’m happy to see Freddie Mac has committed to going after these freeloaders for deficiency judgments. It’s high time. The good thing is that with the BK reform they won’t be able to just blow it all off if they pass the means test and can actually afford to repay their creditors. These people need to be disciplined before they take the whole economy down with them.
“The good thing is that with the BK reform they won’t be able to just blow it all off if they pass the means test and can actually afford to repay their creditors.”
Consumers who ‘pass the means test’ are generally eligible for Chapter 7.
Some bk attorneys that I know refer to it as the ‘mean test’ ’cause it’s not consumer-friendly.
If they only realized how much that credit is actually costing them! and as they default on their mortgage how that credit may also dry up!
I don’t know how we turn our consumption for all things into a more reasonable behavior. Just keep raising the issue and educating all those that we can.
That’s strange. I’d prefer a place to stay vs. a lot of credit cards.
You’re right, I guess “passing” for the government is “failing” for the consumer…
Seeing as how credit card lobbyists were the impetus behind BAPCPA, we can safely say that failing (the means test) for the consumer is a big win for credit card companies
Gina, I agree that not all consumers are innocent. I’ve just made up my mind a while ago to take the side of the consumers (instead of big business) in this credit crisis.
Also, more on point with Wade’s article. I’m not a fan of walking away. Homeowners need to exit through a short sale or some other type of workout. These are definitely trying times.
Wade, once again great post. it really make me wonder how these people actually survive. I do alot of Gov. loans and as for this scenario I do not see it very often that the borrower is late on the mortgage but not the credit cards. the only thing that will help them is the FHA Secure loan and I have yet to fine a person qualify for it.
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Hi Wade:
That is amazing – I would have not expected that. Thanks for the information.