Debt-Laden Homeowners Save Plastic First
Wednesday, September 12, 2007; 2:29 AM
NEW YORK -- Conventional wisdom has it that people will do everything to keep their homes. Not any more.
The proliferation of no-money-down home loans over the past few years, coupled with the current housing downturn, is giving rise to a new mentality: People will risk losing their homes while doing everything to keep their credit cards.
"This is the biggest surprise we're seeing," said Elizabeth Schomburg, senior vice president of the Family Credit Counseling Service in Chicago. "People are actually coming to us with situations where they are current on their credit cards but are in foreclosure."
That partly explains why credit-card delinquencies have remained low _ despite the recent signs of trending up _ while banks and mortgage lenders are repossessing a record number of homes after years of lending excesses. As some consumers see it, they need to hang on to their plastic as hard as they can, especially at a time when faltering house prices are making it harder for people to access credit through refinancing or borrowing against homes.
However, U.S. consumers' increasing reliance on revolving credit also means banks are more vulnerable to credit-card default in the event of a broader economic slowdown, posing another threat to Wall Street already spooked by escalating home-loan defaults. Just like mortgages, the receivables generated by credit cards are often packaged into securities and sold to investors worldwide.
Any unexpected pickup in past-due cards could "affect the asset-backed securities" stuffed with credit-card receivables the way the unexpected surge in overdue mortgages has hurt investors in mortgage-backed bonds, said Bill Knapp, the investment strategist for MainStay Investments in New York. It could be "just like the subprime area," he said, referring to home loans made to people with tarnished payment histories.
Teesa Rossman and her husband bought their house for about $135,000 two years ago with no money down. But a subsequent _ though temporary _ job loss and the birth of their first child have strained the Rockford, Ill., family's finances in recent months. Just last month, the couple found it impossible to pay all their bills and had to choose between paying the mortgage or the card balance.
They opted to let their mortgage payments go while keeping current on all their cards. "I would rather be late on one thing than on several things," said Rossman, who works at a local church, pointing to the "very high interest rates" on their cards and the need to keep accessing credit.
"But we can't just incur debt forever," Rossman, 24, also acknowledges. "We're cutting coupons, eating very cheaply and doing everything we can to stay within the budget."
So far, the couple's mortgage lender hasn't moved to take back their house.
"I'm sure they can't be nice forever," Rossman said. The couple has put their three-bedroom house up for sale, joining a dozen families trying to sell homes in a neighborhood of some 130 households.
But even though people like the Rossmans are forgoing their mortgage payments in favor of credit-card bills, the crunch that started in the home-loan market is starting to seep into cards and other consumer-credit sectors. Moody's Investors Service, a bond-rating agency, notes that more U.S. consumers are beginning to fall behind on credit-card payments. Credit-card companies, it says, wrote off 4.58 percent of payments as uncollectable between January and May, up nearly 30 percent from the same period last year.
As people like Delana Dowdy in Darby, Mont., found out, falling home prices and tightening credit have made it harder to withdraw home equity to pay off their debts such as credit-card bills. "The appraised value (of the house) didn't come high enough to consolidate our bills," said Dowdy, 36, who runs an antiques store. Right now, she's behind on both her mortgage payment and card bills.
So far, the housing-market turmoil hasn't forced credit-card issuers to dramatically tighten their lending policies, though some banks have begun raising transfer fees and interest rates for some customers.
"Challenges in the mortgage industry have not affected our credit-card policies," said Kevin Rhein, head of Wells Fargo & Co.'s card-services unit. The San Francisco-based bank, he said, continues to be "a reliable, responsible lender that offers competitive pricing for consumers and sound investments for capital-markets investors."
And some analysts don't see an immediate danger to investors holding bonds backed by credit-card receivables. Cynthia Ullrich, a senior director in Fitch Ratings' asset-backed securities group, said the outstanding deals have "sufficient" cushions to accommodate an expected increase in card delinquencies in the coming months.