Desperate Consumers Stop Paying Mortgages in Order to Pay Credit Cards

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foreclosures, mortgages, delinquencies, defaultsNormally, it would be considered a positive sign that people are reducing their credit card debt load. But a series of statistical releases this week confirms an ominous new trend among desperate consumers: They have stopped paying their mortgages but are continuing to pay off their credit cards so they can continue to buy staples, like food.

"People are trying to free up cash so they have it on a daily basis," says Theodore W. Connolly, a bankruptcy attorney in Boston who has just published a new book on the problem, The Road Out of Debt: Bankruptcies and Other Solutions to Your Financial Problems. "People are getting fearful again and are worrying about just paying for their groceries and doing the laundry."

More People Fall Behind on Mortgage Payments...

The Mortgage Bankers Association reported Thursday that the percentage of mortgages that have fallen one month behind is growing. In the first quarter of 2009 the rate was 3.77%, which then fell to 3.31% by the end of that year. But in the second quarter of 2010, the number has gone up again to 3.51%.

"The rate of short-term delinquencies is going up and the increase in these short-term delinquencies may ultimately drive the foreclosure measures back up," said Jay Brinkmann, the association's chief economist.

Brinkman noted that 90-day delinquencies have actually declined from 10.06% in the first quarter, to 9.85% in the second quarter, but that was still above last year's second-quarter figure of 9.24%. He attributed part of the decline to the fact that some borrowers had negotiated loan modifications with their lenders.

...While Credit Card Balances Start to Shrink

At the same time, credit reporting company TransUnion reported that the average outstanding credit card balance was $4,951 during the second quarter, a decline of 13.4%. The delinquency rate on credit cards was 0.92%, a 17.2% drop from the first quarter.

"It's a reversal of tradition," says Jordan E. Goodman, a consumer finance expert and author of Master Your Debt: Slash Your Monthly Payments and Become Debt Free. "People used to pay their mortgages first and let their credit cards slide. But I'm hearing more and more that people are paying their credit cards first because they are going to lose their house anyway and they want to keep their credit card lines open."

One reason people are not as behind on their credit cards these days is that banks have cut credit lines by $2 trillion in the last year, leaving less room for them to get into trouble, he says.

Goodman says the fact that short-term mortgage delinquencies are rising indicates that, in the future, there are going to be more delinquencies. Even worse: 50% of the people getting mortgage modifications are re-defaulting on their loans. "They lowered their payments (in the modification), but it wasn't enough and they aren't able to make the payments because of a lack of income," he says.

A Boom in Bankruptcies


Connolly says the financial plight of the American consumer is illustrated in the soaring number of personal bankruptcies. For the one-year period ending in June, 1.5 million people had filed for bankruptcy, the highest level since 2005, when bankruptcy laws were tightened. Two million consumers filed for bankruptcy in 2005 in order to beat the deadline for the new rules.

"Even though the bankruptcy code was changed to make it a little more difficult to file, people are overcoming that and finding their way into bankruptcy because bills are piling up and debts are getting out of control for many people," he says.

Connolly advises people who are contemplating bankruptcy to pay their mortgages if they want to remain in their homes and not pay their credit cards. There is very little that the courts can do about a mortgage, but they can discharge unsecured debts like credit cards bills and medical bills in bankruptcy proceedings.

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cinc1

The steps outlined below should have been implemented 2 years ago in conjunction with the Fed's Quantitative Easing programs for the banks. Taxpayers received no benefit from Bernanke's policies. We need policies where each consumer is allowed to clean up their household balance sheet based on credit card abuses and mortgage fraud that has been occurring for years. These Policies may be complicated but need to be fair for all. Banks instead of paying bonuses should hire hundreds of employees to implement the following: 1. All "purchase money" loans should get an automatic principle write down regardless of financial status. Not helping folks today with a "purchase money" loan is a disgrace, because this is one situation where the bank is equally at fault if not more at fault. These folks were busy working and trusted realtors, mortgage brokers, government propaganda and the whole FIRE industry to provide sound financial advice. This advice was forced on the homeowner for very large fees and commissions paid out of the homeowners pocket. All homeowners who refinanced and can PROVE with receipts the additional cash after the first "purchase money" loan was for home improvements then this loan should qualify for a principle write down regardless of income in addition to the above scenario. 2. Second Home Loans and HELOC not backed by home improvement receipts and credit card debt should be treated equally under the same new policy. There is no difference between the debt if a homeowner refinanced to pay off credit card debt or if a renter / homeowner did not or have the option. As it stands today after 6 months of defaulting on your credit cards you have no option but to endure the collection agencies and a 7 year hit on your credit report as opposed to a homeowner defaulting on second loans. Why did congress not add a recourse clause to the recently passed credit card act? What good is the credit card act if there is no recourse to recapture the abusive penalties? All debt today already collected and paid, charged off or still being paid should be recalculated going back 10 to 15 years using the new rules for a new outstanding balance. After crediting back to the consumer the years of bad abuses then set up a program for each individual to pay off the debt based on the monthly payment he/she can afford. In addition force the banks to send refund checks to folks who have paid the usury penalties and late fees based on new calculations using the new credit card act definition of credit card abuse. This is fair for both the consumer in debt and the consumer who did not use credit cards or did not do multiple cash-out refi's. There is no disputing second home loans and HELOC are given huge leniency in the credit reporting arena yet are equal to credit card debt. All state recourse and non-recourse laws would have to be overridden. 3. Bernanke can assist the banks via QE 2.0 to absorb the losses the banks will take on in the above policies after the losses have been absorbed by clawbacks on ill gotten gains and bank bonuses.

August 31 2010 at 8:03 PM Report abuse rate up rate down Reply
jbjg24m

my wife and i are fortunate enough to have our house and vehicles all paid for,never led an extragant lifestyle, didn't take many vacations and always tried to pay cash for everything . finally got our house pd off early by paying more on the principal of the mortage when we had the extra money. actually got our house and property pd off 5 yrs earlier this way. have extra money for other things now!

August 29 2010 at 6:56 PM Report abuse +1 rate up rate down Reply
leemar48

I think it's silly to say stop buying from big businesses... businesses support the economy with wages. For every big business, a dozen small businesses feed off the big business. What we need to do is simply refuse to pay credit cards with high interest rates. Banks will lower rates immediately if Americans band together and say "no more". Without consumers, banks will go under. We have the power to control the banks... but only if we unite. The US Government won't take the banks on, because banks support politicans re-elections! If everyone refused to pay their credit card payments or mortgages for 4 months, the banks would fall to their knees. Americans have the power to make the changes our government simply talks about.

August 29 2010 at 12:00 PM Report abuse +3 rate up rate down Reply
1 reply to leemar48's comment
Dismayed

Yeah, everybody's going to stop paying credit card and mortagage payments and incur more debt and penalties, and damage their credit ratings. Only in cloud cuckooland.

August 29 2010 at 5:58 PM Report abuse -2 rate up rate down Reply
Cherie

The fact that some Americans are making choices like this screams. This is the way it is and it will not get better. This is the trend jump started with bad policies that cater to the Progressive elite. November is around the corner. After the "summer of recovery". I really do not need to hear the blame game for the "failure of the fall". 2 things Progessives have mastered. Failing & the blame game. Why? Because they cannot produce.

August 29 2010 at 10:51 AM Report abuse +6 rate up rate down Reply
falconsso

In the spirit of Animal House (toga!,toga!); Big Brother Tea Party!, Big Brother Tea Party!

August 29 2010 at 1:09 AM Report abuse -2 rate up rate down Reply
2 replies to falconsso's comment
alfredschrader

Most people pay too much for food. This isn't much you can do to reduce the cost of your mortgage payment, but you can reduce the cost of your food. You see it every day. People in the check-out line with a cart filled with cardboard box everything - Totinos frozen pizza, boxed waffles, tv dinners, etc. And the girl says " One hundred ninety seven fourty two please " ($197.42)..This is NOT the way to buy groceries. You can make the best tasting Belgium waffles you ever put in your mouth with 15 cents worth of Pilsbury self rising flour & a Black & Decker waffle machine. You can use that same machine to make dimple grilled chicken quarters for 60 cents each. Is easier to use the B&D machine than to take the carboard pizza out of the box & sealed plastic bag it comes in. You simply put the leg quarters into the B&D and push the button. There are lots of very fast & easy ways to make great food for much less expense. A little homework & practice, and you'll be there.....Alfred-

August 29 2010 at 9:35 AM Report abuse +8 rate up rate down Reply
Dismayed

If you mean that the Tea Party is one light in the darkness, then you're right on.

August 29 2010 at 6:02 PM Report abuse -1 rate up rate down Reply
falconsso

Remember in November, that there is other ammunition besides votes.

August 29 2010 at 1:06 AM Report abuse +4 rate up rate down Reply
falconsso

Invitations are being sent out for the Big Brother Tea Party. Good idea, drsimiano

August 29 2010 at 1:04 AM Report abuse rate up rate down Reply
avl14

A HOUSE SHOULD NOT COST OVER 75,000. THE PROBLEM IS THE PRICE IS HIGH AND MORAGE IS WAY TO HIGH. THE MONEY MADE IN JUST ONE HOUSE IS ALOT. FIVE YEARS AGO I BUILT MINE 1200 SQ FOR 35,000.

August 29 2010 at 12:14 AM Report abuse +7 rate up rate down Reply
drsimiano

Well isn't this just some more great news on the homefront. The United States Of America, still touted as the 'richest' nation on Earth, has millions of it's citizens having to make the choice between groceries and making a mortgage payment. It's funny how the government seemed to instantly run to the aid of the 'distressed' banks and financial institutions and insurance companies who were "too big to fail" .. but have no provision from reigning these banks in and demanding that they work with every single homeowner that's falling behind on their payments. Maybe every single homeowner in the country ought to just stop paying their monthly mortgage, even if they are solvent and have the money. I'd like to see what these fat cat pigs in the banking industry would do if they were inundated with the paperwork to try to take back about 200 million homes in one fell swoop. Maybe thats what the country needs ... a Boston Tea Party where everyone throws their payment coupons into community trashheaps and tells the goddamn banks to go to Hell and stick it where the sun doesn't shine when they get there. Every revolution in history has borne out that there is power in numbers ... Fed Up With Big Brother watching Out For Big Business ....

August 28 2010 at 10:23 PM Report abuse +9 rate up rate down Reply
4 replies to drsimiano's comment
Jackson

It's smart to stop making house payments if you're upside down in your home and owe more on it than it's worth. It's very smart to use the money that you would have wasted on house payments to pay off high interest credit card debt; very smart indeed! The truth is that only 20% percent of Americans can still afford to own their own homes; for the rest of us, renting makes much better sense and may serve to to give us freedom of movement, should we be hired for jobs in other states or outside of the US.

August 28 2010 at 9:13 PM Report abuse +7 rate up rate down Reply
1 reply to Jackson's comment
polncorect

Then you get to rent from big business! Great idea!

August 29 2010 at 5:55 PM Report abuse rate up rate down Reply