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Which Bills Should I Pay? How Consumer Priorities are Changing

March 25, 2010

As the present economic crisis continues to unfold, some noteworthy changes in consumer behavior have started to emerge.  One with far-reaching consequences for credit unions is the increasing tendency for consumers to forgo paying for their mortgages while choosing to pay credit card bills.  Between first quarter 2008 and third quarter 2009, the percentage of consumers who were current on their credit cards while delinquent on their mortgages rose from 4.3% to 6.6%.  During the same time period, those who were current on their mortgages while behind on their credit cards dropped from 4.1% to 3.6%.  (Forget the Mortgage, I’m Paying my Credit Card Bill, usnews.com, 2/8/2010)

A variety of reasons are driving this behavior including the fact that it takes much longer to foreclose on a home than it does to shut down a credit card.  Unemployed consumers may need the credit card more acutely since it can pay for daily necessities while the home foreclosure is months down the road.

Although unemployment is the major cause of mortgage defaults, strategic defaults – where consumers who can afford their payments choose to walk away for financial reasons – may be driving some of this behavior change, too.  Brent White, a University of Arizona law professor, makes a thorough argument in favor of choosing strategic default.  Setting aside the complicated moral questions, if more voices like his are heard, could this become the new socially acceptable norm?

What does it mean in terms of projections for loan losses and new loan volumes?  How will underwriting standards change going forward?  Will a consumer who suffered long-term unemployment and lost a home be given a “pass?”  What about one who chose a strategic default?  It is important to consider these shifts in consumer behavior when doing financial and strategic planning recognizing the good, the bad and the ugly emerging trends.

(White, Brent T., Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis, Updated February 2010)

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