Bad Sign for Foreclosures: Credit Cards Taking Priority

Foreclosures and credit cardsA troubling “payment hierarchy” may be here for a while, according to a new study by TransUnion, which reveals that consumers pay their credit cards before their house payment – and more are delinquent on mortgages while current on their cards.
That trend is the reverse of traditional payment and delinquency behavior where mortgages take priority. And it is one more ominous sign that the foreclosure crisis may not be close to peaking.
“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,” reported TransUnion, one the nation’s three credit scoring bureaus.
To the contrary, TransUnion adds. Its 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 third quarter of 2009, from 4.3 percent in the first quarter of 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 the third quarter of 2009, from 4.1 percent in the first quarter of 2008.
Not surprisingly, the payment hierarchy shift is more pronounced in California and Florida, two of the state’s hit hardest by still-climbing foreclosure rates.
In California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in the third quarter of 2007 to 10.2 percent in the third quarter of 2009 – a 191 percent increase. In Florida, the same combination increased from 5.1 percent in the third quarter of 2007 to 12.4 percent in the third quarter of 2009 – a 143 percent increase.
The delinquency percentage is much higher in the lowest scoring segment of consumers, said the credit data giant.
“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 delinquency rate for consumers in the low-scoring segment who were late on their mortgages but current on their credit cards in the fourth quarter of 2007 was 19.1 percent. It has jumped to 29 percent for third quarter 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 source of TransUnion’s analysis was its proprietary, historical database of 27 million anonymous consumer records updated quarterly.

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