The latest economic and policy trends facing mortgage servicers

Join this webinar for an in-depth roundtable discussion on economic and policy trends impacting servicers as well as a look ahead at strategies servicers should employ in the next year.

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Mortgage

Consumers prioritize mortgages over other types of debt

Homeowners more likely to stay current as prices rise

Consumers in financial distress are increasingly placing more value on paying their mortgages first, a reversal of a trend that developed during the housing meltdown.

With improvements in home prices, the 30-day mortgage delinquency rates are well below credit card delinquencies and could remain that way for the foreseeable future. This is a transition back to a traditional payment hierarchy, where mortgage loans dominant in the minds of borrowers, credit bureau TransUnion said.

A recent study by the bureau showed a correlation between home price movement and mortgage payments. When homeowners gain equity or see prices rising, the  debt holder becomes more likely to prioritize mortgage debt. However, in falling markets, where prices are plummeting, other types of debt often take the lead as homeowners become frustrated.

"We did see a big change in the traditional payment hierarchy during the recession," stated TransUnion vice president of research Toni Guitart.

He continued, "Consumers would make payments on their credit cards more so than on their mortgages because that was associated with the big decline in housing markets. But now over the past year, the amount of consumers that are paying mortgages over credit cards has reversed to the traditional payment hierarchy."

The mortgage delinquency and credit card delinquency rates are now much closer, hitting 1.91% and 1.82%, respectively.

"We had previously determined that, beginning in 2008, consumers had a higher propensity to go delinquent on their mortgages than on their credit cards—a reversal of traditional payment patterns," said Steve Chaouki, group vice president for TransUnion's financial services business unit.

He added, "This occurred in an economic environment marked by the build-up and bursting of the housing bubble. In fact, it is broadly believed that the shift in payment preferences was largely derived from the struggles of the housing market."

For the first time since the housing bubble, consumers are valuing their mortgage payments as much as their credit cards, although auto loans remain the most valued of the three.

"While the delinquency spread between mortgage and credit cards for the United States peaked at just over 1%, markets hit hard by the mortgage crisis had much more elevated spreads," TransUnion said.

The housing momentum seems to indicate the traditional payment hierarchy of consumers choosing to pay their mortgages first will continue, but nothing is for certain in today's volatile landscape.

The first few months of 2013 brought a strong housing market as mortgage rates remained low and refinancing activity continued at a rapid pace.

However, falling refi volumes and rising mortgage rates could turn the market once again.

"It’s important to realize that the type of dynamics we can draw between the payment hierarchy and the housing market is compelling, but there are different factors that come into play," Guitart said.

He concluded, "Some of them have to do with factors we can measure such as housing values and some of them have to do with consumer expectations, which are harder for us to gauge. Moving forward, it’s hard to make any type of forecast because the housing market is subject to a number of different issues and shocks that could really turn things around in a matter of days or months."

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