Making mortgage payments took priority over other forms of debt payments during the past year, as the home became an essential place for Americans to work, school their children and stay safe during the pandemic.
Mortgage payments had the lowest rate of 30-day delinquencies, followed by car loan payments and credit card payments in the third quarter of 2020, according to a study of people who hold those three types of debts by TransUnion, the consumer credit reporting agency.
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TransUnion looked at accounts that were 30 days late, which is typically the first sign of payment distress. For the 27.8 million consumers who hold all three credit types, mortgage loans had a 30-day past due rate of 0.75%, car loans followed with a rate of 1.13% and credit cards at 1.95%.
At various times, different credit payments have taken the top priority for people. In 2016, car loans were at the top of the hierarchy.
“The auto loan has been very important to people at times, because they needed a car to get to work,” said Matt Komos, TransUnion’s head of research and consulting in the US. “And after the housing crisis, in the last recession, when homes lost so much value, credit cards were prioritized above mortgages.”
But the pandemic has presented a completely different set of circumstances, said Komos.
“The home has become so important for so many people this year,” said Komos. “If people remained employed they are perhaps working from home now and schooling their kids at home and they want to be sure to have a safe place to be.”
While paying the mortgage has been a priority since 2017, rising home prices, a sharp increase in the number of people working from home and lender hardship programs that help struggling borrowers defer payments have widened the gap between the percentage of mortgage delinquencies and the percentage of overdue car loans during the pandemic.
Bracing for payment shock
Hardship programs offered by lenders – like mortgage forbearance – have allowed borrowers some flexibility and bought them some time. If people are more than 30 days behind because they are in one of these programs, it will not show up on credit reports as delinquent.
That likely helped improve performance for mortgage loans as millions of borrowers took advantage of the forbearance programs offered by lenders soon after the pandemic hit. The study found both subprime and near-prime mortgage borrowers benefited the most from these programs. Borrowers were able to delay payments and maintain their account’s status as current.
While credit card and auto loan hardship programs have generally lasted a shorter period of time, mortgage forbearance programs have been extended for several more months and the Consumer Financial Protection Bureau is now considering putting a hold on foreclosures until the end of the year.
Currently, there are 2.3 million homeowners who remain in mortgage forbearance, representing 4.4% of all homeowners with mortgages, according to Black Knight, a mortgage data company.
“As people roll off of these hardship programs, what we’re keeping an eye on is payment shock,” said Komos. “If they haven’t been paying their mortgage, what happens to their other debts at that point? Do we see the payment hierarchy spread even more because of the importance of the home?”
Consumers clinging to a primary credit card
Keeping at least one credit card in good standing became a priority for credit users during the pandemic, too.
Prior to the pandemic, consumers put their personal loan payments ahead of their credit cards. And they continued to do so during the pandemic if they had multiple cards, although the gap between credit card payments and personal loan payments narrowed.
But that priority shifted during the pandemic when a person only had one credit card and at least one personal loan. The survey found that consumers prioritized their only credit card because the loss of that valuable form of payment for online purchases and the perceived consequences associated with paying late would be too great.
Only 5.3 million people in the study of people with the top three credit types had just one credit card in their wallet. While the mortgage remained the clear priority, consumers with only one credit card valued it more than their car loan beginning in the second quarter of 2020.
These shifts, according to the study, show the heightened importance of keeping access to at least one credit card as online and remote transactions became a daily necessity for Americans during the pandemic.
“There is a sense of, ‘If I can at least keep available liquidity on one card, that’s what is going to be important when I get in distress,’” Komos said.