Which would you rather lose, your home or your credit cards?
It’s a choice most of us would prefer not to face, but for some the answer is that they would rather hang onto their plastic.
In a new study of 27 million credit records, TransUnion says that since 2008 credit card delinquencies have been lower than mortgage payment delinquencies. “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,” according to the company.
Foreclosure, it seems, is no longer the stain it once was.
The New Thinking
How is it possible that credit card debt has become so central while home mortgages failures are not to be feared? The answer stems in large measure from the foreclosure prevention efforts of the past two years.
The government has set up a massive mortgage modification program. As of mid-January the Making Home Affordable effort has resulted in more than 100,000 permanent loan modifications as well as 850,000 with payment reductions.
The catch? Why would the government help modify your mortgage unless you’re either delinquent or underwater? In a perverse way, there’s almost an incentive to default.
There’s no federal tax penalty if you don’t repay a residential loan. It used to be that any unpaid mortgage debt was reported to the IRS and treated as taxable income. No more. The unpaid mortgage tax for residential borrowers was dumped in 2007.
Many lenders won’t foreclose. Loan servicers are supposed to start foreclosure procedures once a mortgage is 60 to 90 days overdue. But with servicers swamped foreclosure can be drawn out, meaning some borrowers can live in a property rent free for months.
Many jurisdictions delay foreclosures. The foreclosure process has been officially extended by an extra 90 days in many areas, but in practice the extensions can be even longer if lenders cannot meet a series of new deadlines and requirements.
Even when lenders do foreclose the loss of a home is no longer guaranteed. Lenders increasingly must prove that they actually own the loan in a small number of court cases. When lenders can’t prove their case, foreclosures have been stopped and some mortgages have even been canceled.
The loan balance is greater than the value of the property Underwater borrowers have little incentive to keep up their mortgage if they can dump their current property and then replace it with something cheaper that’s nice, nearby and for rent.
Everybody’s doing it. It’s hard to worry about a foreclosed home when enormous companies are walking away from their debts. Three years ago investors paid $5.4 billion for Manhattan’s mammoth Stuyvesant Town and Peter Cooper Village apartment complexes. Now, says the New York Times, “the partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion.”
“The sting of foreclosure is just not as painful as it once was,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties and data. “Many borrowers have concluded that real estate is best rented and not owned. The winners in this scenario are real estate investors who buy cheap.”
While the foreclosure process has become delayed and diminished, credit card delinquencies have become more feared.
Credit Card Leverage
Credit card lenders don’t actually need to sue to impact borrowers, they can simply cut off further use of a card with electronic speed. Households that have been using credit cards to pay for groceries or to meet mortgage payments — households that need credit cards — now have an instant problem.
Knowing that they have tremendous leverage, credit card companies are not afraid to use it. They borrow from the government at just about 0 percent and then loan to consumers at rates which routinely reach 25 percent or better. But that’s not all. They also get big money from fees, the fees paid by borrowers and the fees paid by merchants.
Consumers pay late fees, annual fees, and fees for exceeding your credit card limit. As to merchants, they pay so-called “interchange” or “swipe” fees in addition to the interest and charges paid by consumers. Interchange fees average around $2 for every $100 charged. This doesn’t seem like much, however the total from such fees amounted to $48 billion in 2008 according to the Merchants Payments Coalition.
In the same way that mortgage lenders were once seem as supremely risk-free, some doubts are now beginning to show up with credit card lenders. Some are taking big losses as default levels rise. And perhaps even worse, overall debt levels for credit cards are actually falling.
In December Equifax reported that “U.S. consumers reduced their debt by more than five percent or $575 billion from a year ago. First mortgage debt dropped 5.4 percent; credit cards by 7.3 percent and auto loans by 9.5 percent. The declines put overall consumer debt at September 2007, pre-recession levels of about $11 trillion.”
How about that. Debt just isn’t what it used to be.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.