Bank Foreclosures Rise as Homeowners Prioritize Credit Cards- By: John Cutts
Bank foreclosures are expected to continue rising in part because of the increasing number of homeowners prioritizing the payment of their credit cards over their home loans, according to a recent study released by Chicago-based research firm TransUnion.
The trend of prioritizing credit cards was already evident in the last quarter of 2007, but it only began to be noticed widely in the first three months of 2008 when 4.3 percent of homeowners were not paying their home loans but were current on their cards. The trend got more defined when the percentage climbed up in the third quarter of the same year to 4.9 percent.
Last year, in the second quarter, the percentage shot up to 6.3 percent and then further rose in the following quarter of July to September to 6.6 percent.
On the other hand, the percentage of homeowners who were current on their mortgage payments but not on their credit card payments in the July-September quarter last year dropped to 3.6 percent, compared to the 4.1-percent level in the first months of 2008.
According to Sean Reardon, consultant in the analytics unit of TransUnion and author of the report, said that the decision of risking homes to bank foreclosures is unconventional. American consumers have always paid their secured loans first before their unsecured debts, especially when it concerned their homes.
But the hard times have screwed priorities, according to Reardon, and people who have lost their jobs cannot be blamed. Their families have to eat, so they have to guard the credit cards that could buy them some time.
Reardon studied credit-card holding homeowners with a mortgage loan and examined their mortgage and credit card delinquency data between April 2008 and September 2009.
In the July-September quarter of 2009, the default rate for homeowners with low credit scores who are current on their cards but delinquent on their home loans was 29 percent, far above the 19.1-percent posted in the last quarter of 2007.
In contrast, the percentage of low-credit consumers who have defaulted on their cards but up-to-date on their home loans dropped in the third quarter last year to 14.5 percent, compared to 18.1-percent level in the first months of 2008.
According to Ezra Becker, a top financial services executive at TransUnion, the mortgage industry meltdown that caused record bank foreclosures has redefined how homeowners are handling their finances and debt payments.
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John Cutts has been educated in the finer points of the foreclosure market over 5 years.