Thursday, February 18, 2010

Strategic Default - and Paying Your Mortgage Last (not first)

It was one of the golden rules of finance our parents harped at us about: pay your mortgage first. No matter what, stay current on your home mortgage, they said. It’s the biggest investment you’ll ever make, and come hell or high water, make sure you pay it on time.

Now, not so much.

An ever-increasing number of Americans are not paying their mortgage first. Some aren’t even paying it at all. They’re paying their credit card bills first – just the opposite of the way it was, not that many years ago. The number of Americans who are current on their credit card bills but behind on their mortgage payments has increased nearly 50% in just the past year. The figures are tracked by Trans-Union, one of the big three credit-monitoring services.

A combination of factors has led to this change in priority of paying bills. A couple years ago, a lot of folks were able to get into their homes with no money down, during the wide-open (and long-gone) days of “mortgages for everybody”. Experts say with those people, there was no real sense of having worked and saved hard to make the down payment on a house. It was easy to buy a house.

When home prices slid downward, falling 30% or more from their peak in the first half of 2006, a lot of mortgage-payers saw the value of their home drop well below what they owed on their mortgage. Right now, about one in four homeowners is in this situation, which bankers and realtors call “under water” – you owe more on your house than it’s worth, and it will probably never regain enough value to catch up.

While this was going on – the stuff in the housing market that led up to the recession – credit card lenders were going in the opposite direction. Remember when you got at least one “pre-approved” credit card offer in the mail every week? Those days are long gone, too. Credit cards are much tougher to qualify for now, so card-holders are concerned about hanging onto the cards they have. No more “transfer your balance to our credit card for our introductory 6-month rate and save a ton” offers.

There’s another factor that influences decisions on which bills to pay and which to let slide. Credit card companies will shut you off in one big hurry if you get behind on your payments, but a foreclosure takes a long time – anywhere from six months on the short end, to a year and a half on the long end. Go two months without paying your credit card bill and your card suddenly doesn’t work at all. Go two months without paying your mortgage, and you get a snotty letter.

Credit cards can be used to buy gas, groceries, clothes, and all manner of goods and services. With unemployment where it is and the economy where it is, more and more people are paying the credit card bill first, and the mortgage last – just the opposite of what it was a few years ago.

Like the man said, the times, they are a changin’.


  1. Another great story. Thank you Tim

  2. Strategic default was always taught to be a no-no because it was antisocial and somehow immoral. Given that, it should come as no surprise that bankers do it all the time.