TransUnion released a study today that reveals the divergence in payment patterns — where consumers are increasingly apt to pay their credit cards before their mortgages — has now occurred for three straight years. However, for the first time since the deviation began, the percentage of consumers who are current on their credit cards and at least 30 days delinquent on their mortgage payments has declined.
“The latest data from our study show that the new payment hierarchy has persisted for longer than many industry experts initially believed, and provides evidence that consumers continue to adjust their payment behavior in response to their economic and personal financial environment,” said Sean Reardon, the author of the study and a consultant in TransUnion’s analytics and decisioning services business unit. “We continue to see a significant divergence in the rates of consumers opting to pay their credit cards while going delinquent on their mortgages. Though we saw the first decline in the number of consumers who are delinquent on their mortgages and current on their credit cards in the most recent quarter, the percentage of people in this position still remains more than 72 percent higher than it was at the beginning of the Great Recession.”
The latest study is an update to a study released in 2010, which reviewed data up to Q3 2009. The newest study was conducted on consumers that had at least one credit card and one mortgage, and examined 30-day credit card and mortgage delinquency data between the third quarter of 2006 (Q3 2006) and the fourth quarter of 2010 (Q4 2010). The percentage of consumers current on their credit card payments and delinquent on their mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008 (Q1 2008). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the recession had concluded, this has not been the case.
To the contrary, this study found that the hierarchy reversal has become even more widespread, with the percentage of consumers who are delinquent on their mortgages and current on their credit cards rising to as high as 7.4 percent in Q3 2010 (from 4.3 percent in Q1 2008). This statistic dropped for the first time in Q4 2010 to 7.24 percent. Conversely, the percentage of consumers who are delinquent on their credit cards and current on their mortgages decreased to its lowest level ever — 3.03 percent — in Q4 2010. This rate had been at 4.1 percent in Q1 2008.
“The reversal of the traditional payment hierarchy was driven in large part by home value depreciation and rising unemployment, both of which speak to consumer willingness and ability to pay their mortgages versus their credit cards. Home value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Consumer preferences are evolving in this new post-recession environment, and TransUnion’s payment hierarchy study provides a glimpse into how consumers are prioritizing their payments.”
Interestingly, in a February Zogby International survey commissioned by TransUnion, the large majority of adults (79 percent) said that if they could only make one payment in the current month, they would pay their mortgages, followed by just 9 percent who said they would pay a credit card bill and 5 percent who would pay an auto loan. Yet the actual payment performance data belie these intentions. Of the consumers who defaulted in Q4 2010, 52 percent defaulted on their mortgages while keeping their credit cards current and 22 percent defaulted on credit cards while keeping their mortgages current.
The number of consumers delinquent on their mortgages continues to be most pronounced in the lowest scoring segment (i.e., highest risk) as compared to the total market. The delinquency rate for consumers in this segment who were delinquent on their mortgages but current on their credit cards during Q4 2007 was just over 19 percent, and rose to 29 percent in Q3 2009 (data from the last study), leveling off at 30.4 percent in Q4 2010. In a trend similar to that of the total market, the percentage of consumers delinquent on their credit cards but current on their mortgages decreased from 18.1 percent in Q1 2008 to 14.5 percent in Q3 2009, and was down to 12.3 percent in Q4 2010.
Two states that were greatly impacted by the mortgage crisis — California and Florida — continue to have more elevated delinquencies. Within California, the percentage of consumers delinquent on their mortgages but current on their credit cards increased from 3.5 percent in Q3 2007 (the first quarter the divergence took place there) to 10.2 percent in Q4 2010 (a 192 percent increase). In Florida, this same statistic increased from 5.1 percent in Q3 2007 (also the first time the divergence was seen in that state) to 14.5 percent in Q4 2010 (a 185 percent increase). In this same timeframe, the United States experienced an 81 percent increase (from 4.0 percent in Q3 2007 to 7.2 percent in Q4 2010).
In contrast, the number of California consumers delinquent on their credit cards but current on their mortgages declined from 3.3 percent in Q3 2007 to 2.7 percent in Q3 2009, and down further to 2.5 percent in Q4 2010. In Florida, this variable declined from 5.0 percent in Q3 2007 to 3.9 percent in Q3 2009 to 3.2 percent in Q4 2010.
“It was interesting to note that in California during Q4 2010, the percentage of consumers delinquent on their mortgages and current on their credit cards decreased for the second consecutive quarter,” said Reardon. “During this same period, we also see this trend occur in Florida for the first time since the onset of the study. So while the percentages in California and Florida still outpace the national average, it appears that this dynamic may have peaked in those states. As the unemployment picture improves and home values continue to stabilize, we anticipate a gradual return to the traditional payment hierarchy.”
The source of the underlying data used for this analysis was TransUnion’s Trend Data, a proprietary historical database consisting of 27 million anonymous consumer records randomly sampled every quarter from TransUnion’s national consumer credit database. Using TransUnion’s standard definitions of credit card and mortgage trades, TransUnion was able to create and evaluate the custom attributes that are the basis of this study.