Reader Input: Have You Seen This Article?
March 4th, 2008 by Ana
I got an email from a reader yesterday, Kissairis (pronounced “Kiss-Iris” and yes I asked LOL) that simply said:
I came across an article at USAToday.com that I thought you would find interesting — people are foreclosing on their mortgages but still paying their credit cards because they use them everyday
And of course here is the article in question. USAToday calls the trend “alarming” which might just qualify as the media understatement of the year. This is beyond alarming and disturbing, this is a sign of BIG TROUBLE.
Maybe I’m a bit old fashioned, but I was taught you always pay secured debts first. Ok, ok, so my personal finance education was a bit um, lacking growing up and sort of consisted of financial crisis management. But the point remains: if it can be repossessed you paid that bill first. The most important secured debt was always the mortgage! If your car got repo’ed you could always go get a beater for a couple hundred dollars cash that you could putt-putt to work and back in.
My point is: WOW have things changed! I honestly do not understand how a person can be behind on their mortgage but completely current on their credit cards and car note. Do these people plan to live in their cars? Seriously, I am not being a smart(donkey) here. Just what is their plan and method of thinking on this?? The article isn’t very specific, other than people saying they need to get to work and buy gas and eat, with no thought given to where they will live after their houses are foreclosed.
As for the credit card angle in the article: Folks, it is time to put the credit card crack pipe down! It is time to get your priorities straightened back out! The party ended and now it’s time to suffer through the hangover:
an Equifax analysis shows that 38% of delinquent mortgage borrowers had kept all their credit card bills current, and 62% had kept all their auto loans current in the two-year period ending in July 2007. In the past, most people would pay late on their credit cards and auto loans before doing so on their mortgages.
Finally, another cherry-picked quote from the article:
“That suggests that people are turning to their cards in times of financial need,” Zandi says. “They’re losing jobs and overtime hours and other income and trying to supplement their lower incomes with more spending on credit cards.”
Where I come from, if your income goes down you cut expenses. You don’t keep living like you did before the income drop! If your income goes down significantly, you sell things, preferrably things that have bills attached to them. You take extra jobs, and you do what you need to do to keep food on the table (even if it’s mac ‘n’ cheese and peanut butter sandwiches) and the roof over your head.
Maybe I come from a different mindset than the people in the article. I’ve been poor before, and I’ve been too broke to pay attention at least three major times in my life. These people described in the article don’t seem to be able to comprehend that “broke” can be survived without too many psychological scars. These people in USAToday will be tomorrow’s homeless folk … but their credit cards will be current.
Scary times we live in now….
Posted in mortgages |
March 4th, 2008 at 10:06 am
About 10 years ago my parents went through a bankruptcy. We can debate bankruptcy all day long but that isn’t why I bring it up - I bring it up because it was the credit cards they weren’t paying. The mortgage - that was current. I can’t imagine choosing to pay credit cards vs the mortgage.
Honestly, I think credit cards might be more aggressive calling and harrassing you maybe? Maybe people are more scared of those people on the phone?
I have, however, financed a lifestyle I couldn’t afford on credit. When my spouse was laid off from his job unexpectedly when the company he worked for started to go under - we had expenses we couldn’t change immediately that still needed to be paid. We had two completely paid off cars, but we had an apartment lease that we’d have to pay $4000 to break that we didn’t have, and all the utilities etc that go along with an apartment, insurance bills, health insurance premiums, and two student loans (my spouse’s we ended up getting a deferment for hardship until he got another job). But my point is - you can’t always change everything immediately when a sudden loss of income strikes. A lifestyle you can comfortably afford can quickly become a lifestyle totally out of reach very quickly, and we’re not always prepared to deal with that.
Which is why one should have an emergency fund, but we’re older and wiser now. lol. Hopefully if we ever have another serious income issue we’ll be better prepared to deal with it.
March 4th, 2008 at 10:20 am
PaidTwice: I’ve got a half-written post about how to deal with credit card collectors who call you up LOL. Still trying to figure out a way to write it that is truthful but doesn’t get an “R” rating for language and profanity. Loooooots of experience in that department here also!
March 4th, 2008 at 1:19 pm
Dave Ramsey did a long rant on this article sometime last week! He was saying that over twenty years, this has been the case (too bad USAToday is only now reporting it…).
He also said that primarily the reason for this is that when people are overwhelmed with debt and they’re looking at all the payments, the mortgage is always the biggest single payment. If you only have X to spend each month and you have 12 bills, and ONE bill takes up half of X (mortgage), the psychological reflex is to not pay the ONE but to pay the other 11 instead. People forget that the big one is for where they freakin’ LIVE, but nonetheless. It’s the psychological factor of trying to pay off as much as possible, in quantity of debts, not in quantity of money.
Dave also pointed out that credit cards will start calling and harassing you if you “even think about paying late,” whereas a mortgage company may call you after two late payments with a friendly reminder that you’re late. Talk about power! I interpret this to mean that the credit card companies’ tactics scare people into thinking that they’re more important to pay!
Glad you brought this up
March 4th, 2008 at 4:41 pm
People are not paying their mortgages because they have no equity, never had any equity (zero percent down loan), and were not prepared financially to be homeowners. They can’t afford the payments and know they will lose the house, so why throw money at it? They pay the car payment so they can get to work and they pay the credit card bill so they can keep buying the necessities.
These folks will “rent” the house for free from the bank until the foreclosure. Then they will rent another property and not be homeowners again until their credit recovers, if ever.
There are lots of people that consider foreclosure a business decision or at least an inevitable consequence, and do not feel obligated to repay the lender if the deal goes bad. Congress encouraged this thinking by recently passing legislation eliminating income tax liability on the implicitly forgiven debt in a non-recourse foreclosure.
There’s a reason that lenders used to require 20 percent down. Values never went down 20 percent, so the homeowner was always motivated to pay the mortgage by the potential loss of the equity. In addition, banks used to pay attention to repayment risk (the borrower’s credit) as well as collateral risk (the risk the value could go down) and did not lend money to people that were unlikely to pay the bank back.
Consideration of repayment risk went out the window when mortgage backed securities and then sub-prime came along. The thinking was if you built repayment risk into the valuation model, an investor, encouraged by the pool insurance offered by an Ambac or MBIA, would buy the bank’s loans in an insured pool of subprime mortgages. The insurers, not the lender, were supposed to make good on the losses. The lender could loan money to just about anyone, whether or not the borrower had any chance of paying it back, and sell the loan.
So what you have are a lot of people that should never have been homeowners that are not willing and/or not able to pay for their houses. Does this mean there has been a significant change in social values where debt is concerned? I’m not sure, but we will find out over the next couple of years.
March 4th, 2008 at 5:00 pm
Another Reader: Thank you for taking the time to answer my question. What you discribe is an ugly mess just as complicated as the question “Who is to blame for this mortgage mess?” My question now is: if landlords run credit checks for renters, where will all these people live after they finally get removed from their foreclosed houses?
Shanti: I only caught the back half of DR’s rant as I came out of class. Do you remember which day that was so I can go back and listen to the full thing?
March 4th, 2008 at 11:03 pm
ana says: My question now is: if landlords run credit checks for renters, where will all these people live after they finally get removed from their foreclosed houses?
The landlord will just ask for an extra month or two of security deposit. No big deal (especially after not having to pay anything for a year while going thru foreclosure). It’s not that hard to rent, especially with all these empty, newly foreclosed homes.
There’s actually a movement of people who owe more money on their home than their home is worth to purposely lose their home.
check out this website:
walkawayplan.com/
March 4th, 2008 at 11:24 pm
jeff, I unlinked the URL, although people can still cut and paste. I have heard of sites like this one (justwalkaway.com was the one mentioned by 60 Minutes) and I just can’t believe they promise the moon and charge folks a fee. If you read their FAQs page, they even say they can help people whose house has already been auctioned (foreclosed and sold to someone else already). The website you mentioned proclaims itself a proud member of the BBB, but I am having problems seeing just how they managed that.
I guess the old saying about a fool and his money still holds true.
March 5th, 2008 at 3:39 am
It goes against all good sense to not pay your mortgage…. and I do not get it. My mortgage, utlities and food will always become before any other payment of any type… but then again, I have quite the emotional attachment to my home because it is exactly that - my HOME. Not a house I live in.
People do indeed make strange choices…….
March 5th, 2008 at 7:48 am
I think Ramsey was right on this one - it’s the high-pressure tactics of credit card collectors that keeps credit card customers caught up. If mortgage collections personnel behaved in such a manner, less people would be late, but there would be much higher turnover in those position leading to a less-skilled workforce working real estate defaults. At least when people are talking to mortgage companies and attorney offices they are dealing with intelligent lifeform - not sure the same can be said for most credit card collection firms.
March 5th, 2008 at 8:53 am
I was right! The credit card people are meaner!
March 5th, 2008 at 9:05 am
OK, so I need to finish that half-baked post about dealing with credit card collectors on the phone. I learned in the 90s they are all bark and no bite LOL and a few tricks to derail their spiels. Of course, I still have to figure out how to edit out the cuss words I used to use without taking out the meaning….
March 5th, 2008 at 11:29 am
This has nothing to do at all with the actual post but.. I feel famous!
March 5th, 2008 at 7:05 pm
I think it is all about priorities and responsibility. I have a family member that was recently 2 house payments behind and took (not borrowed) money from their 401K to get caught up. AND THEN a few months later told me all about the $300.- plus she paid for some clothing: 2 jeans, 5 bras, 3 blouses. Wow what a bargain!!! NOT.
I realize that there are cases of medical emergencies, job losses - both of these situations have happened to my family! But never did we not pay a bill and never did we spend money recklessly. Like I said - use common sense, have priorities and be responsible. I think DR would agree.
March 6th, 2008 at 7:54 am
You have to understand that these people aren’t really invested in their homes. They bought them for no money down and have no equity, either the house was overvalued when they bought it or they have sucked out whatever equity they had and spent it.
They feel they can walk away and not lose a dime and they are right. It’s the bank that is going to lose.
March 23rd, 2008 at 11:06 pm
The honest homeowners and borrowers are out of luck. We played by the rules and now our homes are worth a lot less than we bought them for. Why? because the lenders were soliciting high risk borrowers in order to make money on home loans.
I am now lumped in with the worst of the worst homeowners. I put money down, did a full documentation loan , and I find out how widespread this corruption is. My home is worth 75% of what I bought it for and is expected to decrease another 15%. Will it recover? yes eventually but paying for this mortgage makes no sense to me any longer. Houses in my neighborhood are in decline and look like crap. I won’t be able to break even in this situation for a long time.
Why would lenders make these loans? I am walking away. It makes no sense to be the honest homeowner in my case. I am paying for the lender’s greed and lack of responsibility.
and yes, people sign on the dotted line for money but anyone can stand on a corner handing money out and ask to be repaid by strangers who I only ask if they have a job and how much they make.. Am I the ass or are they?
July 18th, 2008 at 10:09 pm
[…] I caught up on some reading and found two different articles, both published by USA Today (thanks Ana!): […]