As Home Prices Rise, Borrowers Value Their Mortgage Again

NEW YORK (TheStreet) -- Paying down a mortgage has become priority for consumers again, reversing a trend in the housing downturn.

According to a new study by TransUnion, consumers in financial distress are placing increased value on paying their mortgage ahead of their credit cards for the first time since the housing bubble burst.

TransUnion studies the "payment hierarchy" of consumers. Essentially, they look at how consumers choose to prioritize payments when they are in financial distress, which provides an insight into which type of loans typically see delinquencies first.

Traditionally, mortgage and auto loans have always received top priority. For most consumers, auto loans comes first because most people are highly dependent on their cars for their livelihood. The mortgage is a big financial and emotional investment for many as well. Credit cards, therefore, typically came third. But in 2008, that hierarchy reversed. Consumers still paid their auto loans, but as home prices plummeted and unemployment rose their preferences shifted. They started paying their credit cards first, because healthy credit lines provided liquidity for consumers facing the prospect of job loss and declining paychecks. Whereas they no longer saw value in paying for an asset that was rapidly depreciating in value. So while mortgage delinquencies soared at banks, credit card portfolios actually performed much better. But with housing stabilizing over in 2012, consumers are going back to the traditional payment hierarchy. The TransUnion study found a strong link between the payment behavior of consumers and the housing prices. According to Toni Guitart, VP of Research and Consulting at TransUnion, the delinquency spread between mortgages and credit cards has converged as home prices have risen. The differences in payment behavior in different geographies also validated the link. For instance, in Los Angeles, where home prices crashed after the bubble burst but has seen rapid appreciation recently, the delinquency spread between mortgages and credit cards peaked at 4% but has recently converged to nearly equal levels. On the other hand, Dallas, which was insulated from the housing crisis and has had stable price conditions, have seen no changes in payment behavior.

So what does this all mean for banks?

Improvement in the economy has already led to a strong improvement in credit quality. So overall delinquencies have been declining and are low.

In mortgages, recent originations have been of strong quality, so the new problem loan rates are low. But the TransUnion study also shows that consumers, regardless of when the loan was originated, are now placing more importance in paying their mortgage.

So this might have some implications on how they reserve for future mortgage losses. JPMorgan Chase (JPM) recently said it would release $500 million in reserves for credit card losses in the second half of 2013. It would also release $1.2 billion in mortgage loss reserves. Still, this data was end of 2012 and while the housing market has recovered, things could change if the recovery falters. -- Written by Shanthi Bharatwaj in New York. >Contact by Email. Follow @shavenk

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