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Conventional wisdom has it that people will do everything to keep their homes. Not anymore.
The proliferation of no-money-down home loans over the past few years, coupled with the current housing downturn, is giving rise to a new mentality: People will risk losing their homes while doing everything to keep their credit cards.
"This is the biggest surprise we're seeing," said Elizabeth Schomburg, the senior vice president of the Family Credit Counseling Service in Chicago. "People are actually coming to us with situations where they are current on their credit cards but are in foreclosure."
That partly explains why credit card delinquencies have remained low, despite the recent signs of trending up, while banks and mortgage lenders are repossessing a record number of homes after years of lending excesses. As some consumers see it, they need to hold on to their plastic as hard as they can, especially at a time when faltering house prices are making it harder for people to access credit through refinancing or borrowing against homes.
Credit card issuers have noticed. In fact, they've stepped up their efforts to recruit new subprime customers. Market researcher Mintel International found that direct-mail offers to subprime customers jumped 41% in the first half of 2007, compared with the year before. Among those making the big push: Washington Mutual, up 35%; Capital One, up 18%; and HSBC, up 112%.
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However, U.S. consumers' increasing reliance on revolving credit also means banks are more vulnerable to credit card default in the event of a broader economic slowdown, posing another threat to Wall Street, which is already spooked by escalating home-loan defaults. Just like mortgages, the receivables generated by credit cards are often packaged into securities and sold to investors worldwide.
Any unexpected pickup in past-due cards could "affect the asset-backed securities" stuffed with credit card receivables the way the unexpected surge in overdue mortgages has hurt investors in mortgage-backed bonds, said Bill Knapp, the investment strategist for MainStay Investments in New York. It could be "just like the subprime area," he said, referring to home loans made to people with tarnished payment histories.
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House or credit cards?CNBC's Mary Thompson reports on the more and more people who are willing to give up their houses before their credit cards.
Teesa Rossman and her husband bought their house for about $135,000 two years ago with no money down. But a subsequent -- though temporary -- job loss and the birth of their first child have strained the Rockford, Ill., family's finances in recent months. Just last month, the couple found it impossible to pay all their bills and had to choose between making payments on their mortgage or their credit cards.
Continued: A trickle-down credit crunch