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Forget the Mortgage, I'm Paying My Credit Card Bill

Amid high unemployment and sliding home prices, a growing number of struggling consumers are doing what was once considered unthinkable: paying their credit card bills instead of their mortgages. A recent study developed by TransUnion found the percentage of Americans who were current on their credit cards but behind on their mortgage increased to 6.6 percent in the third quarter of 2009, up from 4.3 percent in the first quarter of 2008. Meanwhile, the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1 percent to 3.6 percent over the same time period.

The data reflects a "fundamental paradigm shift" in the way consumers prioritize payment of debt obligations, says Ezra Becker, of TransUnion. "This is dramatically different," he says. "It is a clear manifestation of the dynamics that lead up to the recession and the recession itself."

Before the housing crisis, bankers typically operated under the assumption that homeowners would do whatever possible to remain current on their mortgage--even if that meant falling behind on other bills. But a combination of factors linked to the current economic mess--falling home prices, high unemployment, and tight consumer credit--have lead many consumers to prioritize credit card payments above mortgage bills.

The development is rooted in the housing bust. When home prices turned south--falling roughly 30 percent from their peak in the second quarter of 2006--a great deal of borrowers watched the value of their homes drop below what they owed on their mortgages. Today, roughly one in four homeowners finds himself in this position, which is also known as being "underwater." Without equity in their homes, such borrowers are more likely to default. "They don't see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages," says Celia Chen, of Moody's Economy.com.

Walking away from a mortgage--even, at times, when borrowers can afford it--has become a less radical prospect. Credit cards can be used to pay for basic necessities, like food, gas, or clothes. And with the unemployment rate remaining near double digits, purchasing such items with credit has become more and more essential. At the same time, the tighter credit environment has made credit cards more difficult to obtain.

Still, another key factor is the disparate consequences associated with defaulting on a mortgage versus those for falling behind on a credit card. National anti-foreclosure efforts have worked to significantly extend the time period between a borrower's initial mortgage default notice and the foreclosure itself, says Edward Pinto, a former chief credit officer at Fannie Mae. "The last thing you have to worry about at this juncture is paying your mortgage because by the time they foreclose it could be six months, 12 months, or a year and a half down the road."

A credit card's ability to finance basic necessities make the trends highlighted in the TransUnion study less startling, especially in a time of high unemployment and widespread negative equity. For a borrower who has got a significant cash shortfall, it is a completely rational decision to pay off a credit card bill while defaulting on a mortgage.

Still none of these decisions are simple. When you hear about strategic defaults, and people choosing to walk away from their mortgages, nobody is flip or carefree about that. Decisions about who you are going to pay and who you are not going to pay are incredibly stressful.

Now a word from the Atlanta Federal Reserve Bank

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With last week's capital orders data giving signals of renewed growth in business fixed investment in equipment and software in the fourth quarter, the question turns to whether this growth will be sustained. So lets go to the Fed Reserve map for a survey of Southeastern businesses on what they plan to spend on capital orders within the next six months compared to the last six.

Of note, 36 percent of respondents indicated that they planned to increase spending over the next 6–12 months relative to actual spending over the past 6–12 months. Another 42 percent said they would leave their spending at about the same level (unchanged), and 22 percent indicated that their spending would fall. The difference between those planning to increase spending and those planning to decrease spending equals a net positive of 14 percent.

For those who planned to increase spending on new plant and equipment, the most commonly given reasons (respondents could select more than one reason) were that they expected growth in sales to be high (37 percent of those respondents), or they needed to replace information technology equipment (37 percent of those respondents). Also, 61 percent of those planning to increase spending indicated that at least some of that spending reflects investment that had been postponed because of the recession. Not surprisingly, for those who did not plan to increase spending, the most commonly cited reasons were the expectation of low growth in sales (cited by 47 percent of those respondents) and heightened economic uncertainty (cited by 39 percent of those respondents).

So where does that leave things? Probably with more questions than answers. For instance, the fact that about two-thirds of the firms that are planning on increasing spending are doing so because they had postponed capital expenditures during the recession would be consistent with some bounce in capital spending by businesses following the most recent recession. But how sensitive are firms to changes in economic conditions? Currently, we hear a lot anecdotally that cash is a high priority on firms' balance sheets as a precaution against economic uncertainty. If sales were to increase more than expected, how fast would firms rethink their investment spending plans?

Based on responses from 320 businesses across Alabama, Florida, Georgia, Mississippi, Louisiana, and Tennessee.

The groundhog has spoken

Punxsutawney (puhnk-suh-TAW'-nee) Phil has emerged to see his shadow before chilly revelers in Pennsylvania, meaning winter will last another six weeks.

FannieMae's Loan Workout Hierarchy

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The steps followed by the loan processors in examining what Loss Mitigation Options are available to you (the borrower).

Fannie Mae's loan workout hierarchy requires that you first determine if the Home Affordable Modification Program (HAMP) is appropriate. If the Home Affordable Modification Program is not appropriate, then consider other foreclosure prevention alternatives to resolve delinquencies.

View the Loan Workout Hierarchy fact sheet, which includes descriptions of each loss mitigation option.

Servicers Profit More by Foreclosing rather than Modifying

A new report from the National Consumer Law Center (NCLC) discloses that mortgage servicers – including many large banks – have found it cheaper to foreclose on homeowners than to offer loan modifications that would benefit homeowners and investors.

The result: Americans who might be able to stay in their homes under a loan modification plan are being moved right past that option and on to foreclosure.

The new NCLC report, “Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior,” reveals that servicers, unlike investors or homeowners, generally don’t risk losing money on foreclosures. In fact, servicers usually make money on foreclosures.

Underwater Mortgages & Guilt Double Standards

Corporations that walk away from underwater mortgages are called "smart" while individuals who do the same thing on a much smaller scale are called deadbeats. Why is that again?

Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can't pay its mortgage. That's good business. Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he'll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can't.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000. "I have 12 years of money put into this property that I will never get out," said the 50-year-old Gilson, from Rapid City, S.D. "But I am still paying because this is what I have been told to do. That's what I think is right."

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country -- Florida, Nevada, Michigan, California and Arizona -- the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they're deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They'll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York's trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan's east side, it's the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city's middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 -- right at the market's peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.  And you thought you overpaid for your house. "They made assumptions that things would grow to the moon, and things certainly did not," said Len Blum, a managing partner at investment bank Westwood Capital.

Tishman said last week that it was turning the property back over to creditors to avoid filing for bankruptcy protection. In recent weeks, Tishman failed to restructure $4.4 billion in debt, and couldn't find another buyer, according to a statement from the company.  Tishman exits the deal with a ding to its reputation, but it will be fine. It still has Rockefeller Center and the Chrysler Center in New York, and dozens of properties in cities worldwide. The company has about $33 billion in assets.  Residential homeowners wouldn't get off so easy.  For most underwater homeowners, the thought of walking away from their commitment is impossible to fathom. After all, it's part of the culture. Pay your bills. Uphold contracts.

University of Arizona law professor Brent White, who has written about mortgage walkaways, says societal pressures often trump what's actually legal. He thinks individual borrowers believe they are obliged to repay their loans even when it isn't in their financial interest.  "The problem is that we have a structure whereby corporations can walk away with impunity but individuals can't," White said.

Gilson reads what's happening 1,700 miles away in Manhattan and gets angry.  His mobile home started depreciating the minute he moved in 12 years ago, much as a car loses value as soon as you drive it out of the dealer's lot.  Three years ago, he bought a new home that he lives in with his wife. Since he can't sell the mobile home for anything near what he paid for it, he rents it out in order to make the $300.36 mortgage payment every month.  "I get so stressed over this," Gilson said. "It's like the elephant in the room and there is nothing you can do about it."  Gilson is frustrated that real-estate tycoons can default on a $4.4 billion mortgage, but he's not supposed to do the same on his $31,000 loan.

How can you blame him?