Executive Summary
As the recession forces more families to consider their fiscal priorities, more are being hit with a painful conundrum: Without enough cash to cover all payments, do I pay my mortgage first or my credit cards? Many still pay both, and some can no longer afford either, but those who have to choose are increasingly favoring their credit cards.
The stigma formerly associated with foreclosure is disappearing or, in locales hardest hit by the housing bust, completely gone. This brief, shows that the disappearing stigma is coupled with a rational consideration on the part of consumers to maintain liquidity in times of financial hardship.
What is the research about?
This brief draws on credit data for more than two million individuals in an effort to unmask consumers’ payment preferences and then explain why they tend now to prioritize liquidity (credit cards) over hard assets (mortgages). The fall in home values accounts for some of this behavior, but we see here that the need for cash is actually a more important consideration. A change in available credit of one standard deviation is a better predictor of mortgage delinquency (25%) than a change of one standard deviation in the price of the house (13%).
What are the credit union implications?
Delinquency is often a credit union’s first sign of trouble. The logical extension of the findings in this brief is that credit unions might actually be able to save some of their members from eventual default by offering more short-term credit rather than cutting back at the first sign of trouble. Cohen-Cole is quick to caution that each borrower’s situation is unique but that the approach could help.
The greater opportunity lies in using this data to build products that help stave off future delinquencies. For example, attaching an appropriate line of unsecured credit to each new mortgage could help forestall mortgage delinquency down the line and serve as a canary in the coal mine for credit unions that want to help members stay current on all their loans.