More choosing credit card payments over mortgage payments

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?

Follow me on Twitter @atlbargains or on Facebook at AJC Atlanta Bargain Hunter

21 comments Add your comment

DMB

March 30th, 2010
11:21 am

What’s the point? Banks got their bailout; taxpayers/homeowners on on the hook. Really don’t see a loyalty to the banks or the system. Seems like a big scam to me. Value of my place tanked over $50,000. Seriously thinking about just walking away and telling Atlanta, greedy developers / real estate agents and the whole system to kiss my …

Owner

March 30th, 2010
11:54 am

I am not exactly sure why people in Atlanta feel they are so bad off. Homes lost value but the forecast for the next 3-5 years is price gain. Yes, it might not be where it was but I have considered a move to two area impacted greatly and those people have homes they bought for $1M and can’t sell them for $500K (10-20 years to get back to zero loss and that is a big maybe). You will never get that back in most homeowner’s lifetime but nothing in Atlanta was that horrible unless you bought in the $700k+ range with no money down and then you probably learned a very big lesson but it will still come back over time. This market was built on movement and an influx of people with good jobs. Nevada and Florida are service related industries where people bought way over their head.

jw

March 30th, 2010
11:56 am

Seems to me the very same institutions that ENCOURAGED most of us to buy more house than we could afford would be more willing to work on a solution to keep folks in their homes without the feds coming up with some goofy ‘protection’ act. It would seem good business for the institutions to help – the original loan balance is paid back to a bank in a handful of years – when a 30 year 100k mortgage costs the borrower over 400k during the 30 years – don’t tell me the lenders can’t do something – they make their money back in the first 5 to 8 years. That original loan money has been milked for every penny it is worth by several different investment companies within that time – banks don’t lose that much – sorry – they could be more helpful and less “by the book” – they sure lost those pages when passing out the money!

Doug

March 30th, 2010
12:04 pm

The mythical ‘American Dream’ of home ownership is a pretty thin one in 2010. My mortgage is an albatross for my wife and I; we have never missed a payment and are current on all our debt, but we can’t sell our home to move closer to work. When we are able to sell, we probably won’t bother buying again. If it came between the portability of my credit cards or the excess baggage of the mortgage, I’d choose the cards, too.

JJ

March 30th, 2010
12:18 pm

I LOVE BEING DEBT FREE!!!!!!! Except for the mortgage, everything else is paid in cash.

No credit cards here! NO DEBT!!!!!!!

It’s called …… wait for it……living WITHIN my means!!!!!

Janet_G

March 30th, 2010
12:37 pm

The reason a lot of people pay the credit cards first is because the collectors are much more aggressive for credit cards than for mortgage companies. Pay your bills using the “four walls” system. First, food, then utilities, then the house and then, transportation. Everybody else gets a little bit of whatever’s left over.

We paid off all of our credit cards, we drive two older, paid-off cars and our only debt is the house, which we bought in an older neighborhood to make sure we could afford it. For “emergencies and necessities”, we have a savings account that we add to each month. If we can’t pay cash for something, we don’t buy it until we have the cash.

It’s so wonderful to live debt free! It’s like being let out of prison! We will never have a credit card again and we don’t miss it at all. We can purchase things online, rent cars, make plane reservations, etc. with no problems. If someone refuses to take a debit card, we don’t do business with them anymore as there are plenty of other options.

People, stop being slaves to lenders! Get debt free and stay that way!

N

March 30th, 2010
12:49 pm

This is a trend that despite the increase will remain very small as most people would not favor unsecured credit cards being current over their home. For anyone that can hold on their home values will come back, just look at our history in the last 50 years. Furthermore even if you keep your CC current the credit limit could be reduced or the card cancelled at anytime. Add to that the chance that your face the bank coming after you for the huge deficiency on the foreclosure and its not really the best way to approach it.

Yohan

March 30th, 2010
12:57 pm

When people see the way banks get treated by the government, having $ thrown at them to cover over their mistakes, with no repurcussions to them other than a dip in stock price, then yeah there are those people who rationalize that it is ok to do, that nothing bad will happen to them.

Then again, they did sign off on those adjustable rate loans, interest only mortgages and “liar loans” so they’ve set themselves up in these positions willingly.

C

March 30th, 2010
1:00 pm

Some of the comments here assume that housing prices will come back in the next decade. I offer that the housing bubble was severly inflated, much like the dot com bubble of 2000. Has the Nasdaq come back to the yr 2000 level yet? I’ll be a senior citizen before the housing market recovers in real, non-inflationary, terms. That’s altleast 25 years out.

Steve

March 30th, 2010
1:03 pm

If you a currently only able to make the minimum payment on your credit cards consider this. If you default on your home, be prepared to see the interest rate on your credit cards increase dramtically.

N

March 30th, 2010
1:08 pm

housing bubble? Yes. But its not a dot.com bust. For those diversified the stock market as a whole did very well in the 2000’s. Believe it or not prices will come back. Talk to homeowners who have owned for 30 years. Who have been in Texas and California. Markets come back in real estate. New construction slows to almost nothing yet the population keeps growing it makes sense that prices will rise…they have already risen 8 Months in a row from year ago levels. Plus at the same time you wait it out you are also paying down your house. Talk to any realtor who has done it for 20 years and they will tell you this is not the first time. Markets go in cycles.

Annon

March 30th, 2010
1:11 pm

I buy things I don’t need, with money I don’t have, to impress people I don’t know.

That was the trend for many, up until about a year ago………

Belinda

March 30th, 2010
1:17 pm

I think the home prices in metro Atlanta really depend on the local area that you live. Homes in my neighborhood have dropped $150, 000 or more. And they haven’t begun to improve yet. The only homes that have sold in the last 2 years are foreclosures that have been bought at prices nobody would have ever believed 3 years ago. We are not underwater. We have lived here 16 years and we could get more than we owe for the house if we had to sell. We have no debt except for a mortgage. We actually just bought a 2nd house for investment purposes.

Sarah H

March 30th, 2010
1:29 pm

Need a loan? Can’t get one. Don’t need a loan? Banks are begging you to take one. What is wrong with this picture?

Lexxus

March 30th, 2010
2:20 pm

My husband and I have been able to stay a float on both our credit cards and our mortgage(s)…It is really hard considering the value of our home have decreased about 30-40%….the school system stinks and the taxes are increasing on our properties…We try to get it refinance to put both mortgages back together but the VALUE IS NOT THERE….it’s really depressing especially when the house across from you is sold for about 50% of it’s value….I think the homeowners that choose to stay and pay their mortgages SHOULD NOT be penalized because their neighbors choose to bail or default….that’s just my opinion…

Glass House Rocker

March 30th, 2010
2:21 pm

A few years ago Congress eliminated interest on credit cards as a specific tax deduction. At about the same time banks were allowed to increase interest rates to usurious percentages–the kind of rate that street lenders and thugs charged if one missed a payment to them.

Even worse, banks can legally raise a rate ‘just because’–thanks to Congress. It sounds like collectors are threatening those who cannot pay. There are laws which govern the efforts of these people.

Just like “collectibles” Real Estate values have never been guaranteed to increase–remember Beanie Babies? The housing market was artificially inflated by lenders, their
“independent appraisers”, easy money and “overly optimistic?” buyers.

Reality is harsh. People are forced into decisions they never thought would apply to them.
The minimum payment on a credit card with a 25-29% interest rate is tantamount to a debtors’ prison. Kinda makes me think the lender might be disappointed if the loan were paid.

One thought to help out those who have become the typical credit card holder is to made interest rates over the original promised rate tax deductible.

The banks make their money. With more cash in hand, the wage earner–i.e.the taxpayer- is able to select and make purchases for goods and services. The purchaser decides which companies survive and grow. More employees are hired. The tax base increases instead of the unemployment roles–or well-fare lines.

The government does not have to dole out money it does not have and which will become worthless . Inflation looms.

Of course, now is a great time to buy if you have the resources. There is opportunity in a down economy. Unfortunately, the Chinese–among other foreign investors–are in a much better position to take advantage.

Bill

March 30th, 2010
2:37 pm

There may be a catch here. Credit card companies monitor credit reports, not just your payments to them. Miss the mortgage payments, and your credit card interest rates could skyrocket, or you could get canceled.

A couple of years ago, the Republicans tightened up bankruptcy requirements, otherwise, that would be a big help to a lot of folks right now.

Liz

March 30th, 2010
2:50 pm

My sister in law is WAY upside down in her mortgage, and on the brink of foreclosure. She bought way too much house that she couldn’t afford, then immediately took a second for about $40,000. She now owes $220K on a $175K home……..tsk tsk tsk…..

Sad thing was, when she divorced my brother, she got $30K cash. Didn’t put one penny of that down on the house. Instead, she bought $30K worth of furniture for her new home.

Now she’s broke, owes $24K on furniture and $250K on her home, and is in debt up to her eyeballs…….and wonders why she has to work two jobs to keep up……

Samantha

March 30th, 2010
3:26 pm

My father always taught me to pay myself first. 10% of my take home pay gets transferred into a savings account, twice a month.

I’ve done this since I was 17 years old……

I’m on a cash only basis, and I NEVER spend my change. It all goes into a jar at home. Over one year, I saved close to $300, just in change…….

Fed Up

March 30th, 2010
8:40 pm

If somebody is going to renege on a contract, there is no moral difference between the credit cards and the mortgage. Just because “everybody else” is handing in their keys doesn’t make it right!

Credit Card | Mozilist

April 15th, 2010
2:07 am

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