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Consumers Pay Auto Loans Before Mortgages

Consumers Pay Auto Loans Before Mortgages

A new TransUnion study has found that consumers are once again prioritizing their mortgage payments ahead of their credit card payments. This reverses a trend that began in September 2008, when the mortgage crisis drove consumer payment preferences toward paying credit cards ahead of mortgages.

The study also found that consumers have placed an emphasis on paying their auto loans before their mortgages and credit card payments — by a wide margin — since at least 2003.

“One of the biggest impacts of the Great Recession to the credit system was its influence on consumer payment patterns,” said Ezra Becker, co-author of the study and vice president of research and consulting for TransUnion. “As unemployment rose and home prices cratered, increasingly more consumers were faced with financial constraints and had to make difficult choices — and many chose to value their credit card relationships above their mortgages. This was a measurable result of the economic environment, wherein many consumers were underwater on their mortgages and at the same time needed the liquidity afforded by credit cards to make ends meet.”

 

30-Day Delinquency Rates for Consumers Possessing
Auto Loans, Credit Cards and Mortgage Loans
(Delinquency rates only reflect consumers with all three credit products)

Year

Mortgage

Credit Card

Auto Loan

SEP 04

1.26%

2.25%

0.95%

SEP 05

1.24%

2.24%

0.89%

SEP 06

1.32%

2.41%

0.97%

SEP 07

1.71%

2.51%

1.01%

SEP 08

3.32%

3.29%

1.65%

SEP 09

4.92%

3.99%

1.62%

SEP 10

3.67%

2.62%

1.33%

SEP 11

2.94%

2.24%

1.04%

SEP 12

2.42%

1.81%

1.04%

SEP 13

1.79%

1.86%

0.89%

DEC 13

1.71%

1.83%

0.87%

 

To determine how much of an impact housing prices had on the rate of payment of credit cards versus mortgages, TransUnion looked at the delinquency spread between mortgages and credit cards over the past decade, and compared that spread to the Standard and Poor’s Case-Shiller 20-City Home Price Index (HPI). For instance, if the 30-day credit card delinquency rate was 1.50% and the 30-day mortgage delinquency rate was 2.25% at a given point in time, then there would be a 0.75% spread between the two variables.

“This was an especially enlightening part of the study, because we found that home price appreciation and depreciation can impact mortgage and credit card payment patterns quite differently, depending on whether consumers consider the environment ‘normal’,” said Toni Guitart, co-author of the study and director of research and consulting in TransUnion’s financial services business unit.

“While we saw massive home value appreciation between 2003 and 2006, the spread between credit card delinquency and mortgage delinquency remained effectively the same; that is, the home value appreciation, while big, was expected and therefore not a driver of change. However, once home values experienced major declines in 2007 and 2008, the delinquency spread narrowed to the point where more people were opting to pay their credit cards before their mortgages — something that was unimaginable just a few years prior.”

Through all of 2006 the HPI was near its all-time high at just above 200, and the 30-day delinquency spread between credit cards and mortgages maintained a stable, negative level. For instance, in June 2006 the spread was -1.18%, which was derived by subtracting the credit card delinquency rate of 2.47% from the mortgage delinquency rate of 1.29%. The HPI was 206.31 at that time.

 

Over the following two years, the HPI dropped 21% to 161.82 by September 2008. This in part drove increasingly more consumers to pay their credit cards before their mortgages, causing the delinquency spread to move 122 basis points from -1.18% in June 2006 to +0.04% in September 2008. This new payment hierarchy trend — with more consumers choosing to pay their credit cards and go delinquent on their mortgages — continued for five years, with a peak delinquency spread in June 2010 of +1.18% when the HPI was 147.22.

 

“When the market dynamic is what people expect, i.e., home values are increasing and unemployment is under control, then the payment hierarchy is stable. It’s when an unexpected shock hits the market, like home value depreciation or major increases in unemployment, that the payment hierarchy is subject to change, as consumers reassess which loan relationships are more important to them at that time,” continued Becker.

Major variances were found across the country, with cities such as Los Angeles — which was greatly impacted by the mortgage crisis — experiencing much different consumer payment patterns than cities such as Dallas, which had a more stable housing situation.

The credit card-mortgage delinquency spread “flipped” in December 2007 in Los Angeles, meaning that was the point at which more consumers in the study were going delinquent on their mortgages than on their credit cards. This pattern continued through the end of the study in December 2013, with the delinquency spread essentially remaining the same. In contrast, Dallas experienced the reversal in payment patterns much later — beginning in June 2011 — with that reversal only lasting through September 2012.

 

Payment Hierarchy Shifts in Key Markets

Market

Timing of Original Shift – Paying Credit Card Ahead of Mortgage

Return to “Normal” – Paying Mortgage Ahead of Credit Card

Length of Shift

Boston

MAR 2009

DEC 2012

3 Years, 9 Months

Chicago

JUNE 2008

(Has not reverted yet)

5 Years, 6 Months+

Dallas

JUNE 2011

SEPT 2012

1 Year, 3 Months

Los Angeles

DEC 2007

DEC 2013 (Spread is 0)

6 Years, 0 Months

Miami

SEPT 2007

DEC 2013

6 Years, 3 Months

New York

JUNE 2008

DEC 2013 (Spread is 0)

5 Years, 6 Months

 

“It’s been well documented that the Great Recession impacted different areas of the country to varying degrees,” said Becker. “While unemployment generally went up throughout most of the country, some areas saw more job losses than others. Markets that experienced extreme housing value increases and declines also saw the biggest shifts in payment dynamics. As unemployment gradually improves and housing prices recover, we expect every major metropolitan city will revert to the traditional payment hierarchy.”

 

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