Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
This was a thesis I wrote about a few years ago on FMMF, and now the data continues to confirm it – in the “new normal” era where many people “bought” houses with little to nothing down – if not a 100%+ LTV loan – having no skin in the game has led to a new generation of Americans who put paying off the mortgage lower on the totem pole than credit cards or auto loans. [Apr 1, 2011: Consumers Continue Trend of Paying Credit Cards Before Mortgages] Obviously the no skin in the game aspect is just one reason – an eventual default on your mortgage now often takes years to come to fruition – during which time one can live ‘rent free’ and build up savings. And ironically pay off the credit cards. Contrast that to the harassing phone calls that come much more quickly in the process if one becomes late on credit cards or auto loans. Not to mention the fact repossessing a car is a much quicker process than repossing a home.
Obviously something of this sort used to be atypical when people actually put 5-10-20% down on mortgages. Marketwatch reports on a study done by TransUnion showing this sea change in American behavior.
- In a new twist in how bills are paid, cash-strapped consumers increasingly are fearful of losing their cars, choosing to make auto-loan payments ahead of their home mortgages and now even credit-card payments, a study released Thursday showed.
- According to the latest analysis of open loans by TransUnion, the credit-ratings agency, nearly 40% of some 4 million consumers tracked last year fell behind on their mortgage payments, while keeping both their auto loans and credit-card balances
- The national delinquency-rate average of those behind on their mortgages stands at 6%, compared with 0.78% who are 90 days late on credit cards and an even lower 0.46% (a historic trough) who haven’t made a car payment in 60 days.
Mark’s note : this is obviously all related. For the millions who no longer pay for the house they live in, the massive cash flow allows them to keep current on auto loans, credit cards as well as fund new purchases. Hence people who would normally be delinquent on credit cards or auto loans are flush with cash. I have written many times the past 3 years that, ironically, once the system works through all the foreclosures – still years away – it will actually be a negative for consumer spending in this country.- TransUnion refers to this as the “payment hierarchy,” which first shifted away from covering the mortgage as the No. 1 household priority in 2008, at the onset of the recession. The thinking then was that credit-card payments were far more important than mortgage payments because many consumers were using plastic to buy necessities like food and clothing.
- Today, TransUnion believes the shift in payment preference to auto loans is that your car is intrinsic to you finding a job and getting to it. Plus, Becker said, your car loan isn’t negotiable with minimum payments. “The impact of repossession is greater than the loss of a credit card,” Becker added.
- In Florida, for example, a whopping 50% of consumers tracked were 30 or more days behind on their mortgage payments but current on credit-card and auto loans. Only 6% were negligent on auto loans while staying on top of credit cards and mortgages, while 11% were remiss on credit cards but current on mortgage and auto loans.
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