There once was a time in the not too distant past when a homeowner’s mortgage would be paid even if every other payment was made late or not at all. A current mortgage, after all, meant that there would always be a place to live.
Things have changed, and changed in a big way.
Transunion reports that back in the first quarter of 2008, 4.3% of consumers held the dubious distinction of being current on the credit cards while being delinquent on their mortgages. [1]
That rate has jumped over 68% as of the last quarter of 2010, at which time 7.24% of consumers were current on their credit card bills but delinquent on their mortgages.
That’s a big change… and a disturbing trend.
I suspect the reason for this change is that there’s been a huge societal shift in attitude where foreclosures are concerned. Once considered taboo, foreclosures have been so common that the taboo has disappeared and “strategic default” has come to be considered an acceptable solution, by some.
Why do you think more people prioritize their credit card bills over their mortgages?
Your comments and questions are welcomed below. Thank you for reading the Bryan Ellis Real Estate Letter!
[1] http://www.marketwatch.com/story/paying-the-credit-card-before-the-mortgage-2011-04-01
Anyone who chooses to pay their credit card bill instead of their mortgage payment doesn’t know that credit card companies periodically check their customers credit. When they do they see that the customer now has late payments of 30, 60, 90 or more reflected on the report. In an effort to “not go down with the ship” the creditor either closes the account or cuts the credit limit down to the current balance. The borrower can’t charge another penny on the card, the interest for the month is placed on the report as the current balance and the customer is now over his credit limit.
He is now in jeapordy of losing his home and his credit card has just been rendered “useless”. He’s played a fool’s game and is losing all rounds.
Financial iliteracy runs ranpant in our society, fueled by myths and misinformation…it’s at epidemic proportions and a complete tragedy!
The worst part of the tragedy is that the real estate and mortgage industries continue to spiral downward and the economy worsens.
Foreclosure is not a solution; it’s a last resort!!!
This is a case of the obvious being TOO obvious to be noticed by many. The “obvious-but-unnoticed” part is that paying on the cards while letting the house payment go is a waste of money (and hope), since once a foreclosure action hits the borrower’s credit file, the credit cards go away. Even one or two “90 days late” reports by the mortgage lender can do it.
MORAL: If you’re gonna default, you may as well default on everything. Selective salvation is NOT an option in the modern financial game.
I am thinking that most people today are hveing hours cut, no raises and there thingking that the ship is going down try to hold on to what you can!
Do not pay anything. Wait to be kick out of your house.
Rent a place and save your money.
This is my situation. With the condo I am defaulting on, I have lost over $12,000 per year plus it has decreased in value from $150,000 to $55,000 in three years. There is no light at the end of the tunnel and even if my mortgage payment was zero, I’d still be losing money each month and be in a negative equity position of about $65,0000. I see the credit card bills decreasing being paid off in a year. At this point I don’t care about my credit and had a significant drop in income 4 months ago so some payment had to go.
Dee’s comment about financial illiteracy is true, BUT….the real problem here lies at the feet of the bankers and Wall Street who have unashamedly taken HUGE advantage of financially unsophisticated homeowners. The government regulators, for the most part, are also complicit in the largest transfer of wealth from the masses to the “fat cats” in our lifetime if not ever. What really gets people angry is that NO ONE has been punished or called to account for the biggest financial rip-off of all time!
But let’s not pussy foot around the issue being discussed. Big Business, i.e. the large REITS, etc. have chosen “strategic default” as an acceptable business decision. Therefore, the “small” guy who has bailed all the big boys out with tax dollars is feeling very much left behind. The homeowners I have dealt with who are in foreclosure or working a short sale definitely feel it is their way “to get back” at the banks. Most are hurting so much financially (no job, retirement and savings gone), the last thing they care about is a credit rating. Many have sworn off debt completely. Their primary concern is a job and putting food on the table. This major shift in thinking will not be shaken off quickly and I see a very long and tedious recovery in the housing market. The 80′s-90′s S&L was a walk in the park compared to what’s happening now and many R.E. markets to 10-15 years to recover from that one.
The reason some people are not worried about Universal Default is that they are doing cash advances. Before they go late on their mortage, they max out all out all their cards so the credit line can’t be taken back. Then they pay minimum payments from their cash filled bank accounts. Meanwhile they still continue to apply for cards. Miraculously they still manage to get a new card every few months or so.
Being that I’m in the trenches, I truly know what’s going on out there. Many are just trying to buy some time in the hopes of a short sale, a better job, or a change in the economy.
Their algorithms are set much tighter these days but credit cards are all we have left of the good ‘ol days of high falutin, free wheelin, easy money, greed is good investment strategies!
BTW, Here’s an thought. Rather than using a high fee, high interest “convenience” check ever consider opening a merchant account with PayPal? You’ll pay a nominal fee, get reward points, and the cash goes right into the bank account of your choice… hmmmm
All the best,
Pastor Stephen Horrillo
The credit card companies seem to be constantly reviewing everyone’s financial situation. I know a guy who had over $250,000 worth of credit available on his cards. His income dropped by 75% and his credit dropped to 100,000. I’m amazed he kept that much. So it seems that a substantial decrease in income or failure to pay any type of debt on time will be discovered by the credit card companies and will render the cards almost useless.
As others have said, you may as well default on everything if you’re going to stop paying the mortgage.
I find all the comments interesting. I like the feed back generated by this question. In my humble opinion I would have to agree with the answer given by Mr Vickry.
The best advice I can give is, if you see your income will not be sufficient to cover your expenses and you do not have other resources, the first thing you do is cut out all amenities (cable TV, phones, movies, snacks, entertainment, etc).
If after all the cuts, you still find yourself in the predicament, you can talk with your mortgage lender to see if your payments could be reduced on a temporary basis. Many times the lender will work with you. If this fails, sell your house for the equity you have in it. Some of my friends let their homes go into foreclosure and ended up with 0 (nothing). What a shame to pay on your mortgage for years and then let you equity disappear! Remember, you will still need to provide housing for your family and yourself!
The Big Banks are mostly to blame for this one folks…
When they had the last round of bankruptcy law changes pushed through,
they were hell bent on changing it so that you can NOT get relief from credit card
debt through a bankruptcy proceeding. So now, when a debtor falls on hard times
and seeks the protection of the bankruptcy courts, they can surrender the
house with the debt discharged, but not the credit cards. Talk about unintended
consequences….
it is actually a very real and simple thing that is happening in people’s lives, consider the reality….they took out a new mortgage when times were fat and prices were going up and up every 6 months…however when things turned around and the refinance amount was nowhere near the current assessed value of their once million dollar homes..the found themselves deeply under water and drowning fast….they had refinanced a house that was once valued at 2.5 million and now they are paying a mortgage on a house that is said to be worth every bit of 750 thousand??? they won’t be able to catch up …if they continue to pay the note they are looking at another 20 years of paying for a house that will never regain it’s value….so what do you do? walk away ….rent …do a short sale….and recover…..buy an identical house to the one you are giving up in 2 years at 500 thousand and get ready for a new wave of foreclosures…Greed is never Good….forget Gordon Gecko and all of his buddies…..