During the pandemic U.S. consumers holding mortgage, auto and credit card debt prioritized their home loan payments, amplifying a trend that was already underway, according to research by TransUnion.
The company periodically studies the “payments hierarchy” in times of economic stress.
That specific hierarchy, in place since 2017, was not only maintained, but strengthened throughout the pandemic, according to Matt Komos, Head of Research and Consulting in the U.S. for TransUnion. The purpose for probing the hierarchy is to help various types of lender gauge where they stand with consumers holding multiple combinations of debt. A credit card lender might be less inclined to increase a consumer’s limit if they appeared to be heading to distress, given that the cards come last, Komos suggests.
“These are complex dynamics and the more that lenders understand, the better off they can be to help serve customers and manage their portfolios,” says Komos.
(In the table below and others in this article, the lower the percentage in relation to the other credit types the higher priority the borrower is perceived to be giving it.)
Consumers prioritizing mortgages above all other major credit products
|Credit product 30+ days past due rate*||Q3 2020||Q3 2019||Q3 2018||Q3 2017||Q3 2016|
*30+ days past due rate at 12 months for those borrowers possessing all three credit products.
What’s Behind the Favoring of Mortgage Bills
Multiple factors appear to be contributing to the current state of credit.
First, home prices have been growing in many markets over the last few years, Komos notes in an interview with The Financial Brand, and this has been strengthened in suburban areas as people began seeking suburban housing. While not a universal trend, the desire to get out of cities is a factor, and marks a reversal of a former developing trend towards moving back into cities that had been occurring before the pandemic and the civil disturbances of the summer of 2020.
TransUnion believes consumers want to protect increasing home equity.
Second, TransUnion believes accommodation programs helped mortgage loan performance, with subprime and near prime mortgage borrowers benefiting the most because they were able to delay payments and maintain their accounts. During the height of the pandemic major banks noted during earnings calls that borrowers often enrolled in accommodation programs as a precaution but continued to make monthly payments.
Third, while auto loans became the top priority in other periods of economic stress, the pandemic changed this.
“The mantra, ‘You can’t drive your home to work’ doesn’t have the same effect when millions of Americans are waking up, showering, eating breakfast and taking only a few steps to their home office.”
— Matt Komos, TransUnion
Fourth, TransUnion consumer research indicates that mortgages are valued the most because they are tied to a high-value asset. However, there is also a fear factor involved. Over half of consumers surveyed said they expect to receive calls from lenders if they miss a single payment and one out of five worry about repossession should they miss a payment.
The circumstances of the Covid-19 slump differ markedly from those of the financial crisis and the Great Recession.
The crisis, brought about in part by housing credit troubles and a sharp drop in prices, saw borrowers prioritize credit card accounts over their mortgages. Homes that had developed negative equity weren’t seen as important assets to hold onto versus credit cards that provided a reservoir of liquidity. Auto loans pulled ahead of mortgages and ahead of cards in priority because they were essential for most people to be able to continue to work.
Boomers Adopted Mortgage Credit Priority Earliest
Komos says that there were generational differences in this portion of the company’s research.
Among Baby Boomers, for example, mortgage payments became the top priority as far back as the fourth quarter of 2016. Komos says this reflects the higher amounts of equity many Boomer had built up in their homes by that point.
“They had potentially more to protect,” says Komos.
By contrast, Gen Xers and Millennials didn’t adopt the mortgage priority until early 2020, he adds.
TransUnion does not expect any comeback for home-equity lines and loans so long as rates stay relatively low.
“Consumers are more incented right now to use cash-out refinancing with a regular mortgage than tapping a HELOC or equity loan,” says Komos. He adds that TransUnion research finds that outstanding home equity credit balances continue to fall as repayments exceed new extensions of equity credit.
Looking At Narrower Credit Circumstances
American consumers with all three forms of credit — mortgage, auto and credit card — in actual use represent about 10% of the country’s credit-active population, according to Komos. TransUnion’s research looked at other aspects of credit usage as well.
One analysis, taken from a global study by the company, looks at the impact of the Covid period on credit cards versus personal loans. The company reviewed payment patterns over a 12-month period, including whether they went 30+ days delinquent.
Personal loans mostly prioritized over credit cards
|Credit product 30+ days past due rate*||Q3 2020||Q3 2019|
*30 or more day delinquency rate at 12 months for consumers who possess at least one credit card and personal loan. Source: TransUnion
In the U.S. personal loans were prioritized over credit cards when consumers had multiple credit cards. This continued a trend seen before the pandemic.
TransUnion found a differing trend when consumers had only one credit card.
Priorities change when consumer has only one credit card
|Credit product 30+ days past due rate*||Q3 2020||Q3 2019|
*30 or more day delinquency rate at 12 months for consumers who possess one credit card and personal loan. Source: TransUnion
“In those cases, credit cards were prioritized during the pandemic, in contrast to the pre-pandemic preference for personal loans,” the company states. “This shift demonstrates the increased importance of credit cards for consumers during the pandemic and the need to maintain access to this valuable source of credit.”
On the other hand, Komos points out, consumers with three or more cards, if pressed, can afford to let a card slip rather than not paying their personal loans.