You’re officially underwater, drowning in debt and at the deepest end is a mortgage that amounts to more than your house is actually worth.
It’s time to start bailing, many consumers are saying. A report released by TransUnion says the number of consumers current on their credit cards but delinquent on their mortgages rose to 6.6 percent in the third quarter of 2009 — up from 4.3 percent in the first quarter of 2008.
When forced to choose between having a credit card for expenses or money for payments on a house nearing foreclosure or with plummeting value, the choice for some is to keep food on the table and gas in the car.
“Some people are saying, ‘I can rent the house around the corner for a lot less than my mortgage payments,’” said Mary Ellen Nicol of Consumer Credit Counseling of Atlanta. “It’s a less expensive alternative.”
The consequences are obviously crippling. A foreclosure can drag down a credit score by 150 points or more and result in long-term credit report damage. There could be deficiency judgments and severe tax implications.
In Georgia, there were 12,568 foreclosure notices in the 13-county Metro Atlanta area for March, according to Alpharetta-based Equity Depot. While only 45,000 home owners nationally are currently eligible for the Bank of America Corp.’s recently announced program that would forgive up to 30 percent of the total loan balance, more people are likely to forgo loan payments for the required two months with hopes of getting in on the program.
Even before the announcement, though, thousands of consumers had made a decision to walk away from their loan obligation.
“Borrowers do not make these decisions nonchalantly,” said Ezra Becker, director of counseling and strategy at TransUnion. “It is a stressful decision. The vast majority of people feel an ethical obligation to repay their debts. These are the kinds of decisions people lose sleep over.”
Becker said the study was conducted to help lenders better understand consumer habits. The more traditional order of default has been credit cards, followed by auto loans and finally mortgages. But, as housing values decreased and adjustable mortgages caused payments to escalate, those unemployed and under-employed have had little motivation to dump money into a weakening asset.
The priority for some has been to maintain relationships with credit card lenders by making on-time, minimum payments, thus keeping the credit line open. That credit can then be used for emergencies and necessities.
Nicol said when counseling, she tries to understand not only the fiscal value, but the emotional value of a home to owners contemplating such a move.
“If their goal is to have the house in five years, they are putting that at risk,” she said. “I want to hear the value of the house to them; not necessarily the paper value. I have to consider all the benefits like family needs, the commute to work and how much money they put down.”
The flip in payment hierarchy was most prevalent in California and Florida, according to the TransUnion survey. 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, over the same period, it rose 143 percent. Nationally, the trend was the same, shooting up 68 percent. There were no specific numbers recorded for Georgia.
As alarming as those numbers are, they don’t apply to everyone. The Minneapolis-based Homeownership Preservation Foundation receives 5,000 calls a day from borrowers and distressed homeowners who are seeking solutions.
“Your heart is where your home is,” said Josh Fuhrman, vice president of programs. “People have invested in their communities. They have children in the school district, friends, the neighborhood. We’re not making any recommendations, but putting them in touch with someone who can give them some options. The majority of people want to stay in their home.”
Question: Is it worth keeping your mortgage when you’re underwater? Would you choose, or have you chosen, to stay current on credit cards while being delinquent on your mortgage?