Mortgage Payments are Not the Top Priority in a Severe Recession

When people get into financial difficulties and have to decide which loans to pay, mortgage payments used to come first. That is no longer true:

Paying mortgage isn't a top priority in tough times, research shows, by Mary Umberger, LA Times: If we've learned one thing from the housing downturn, it's that making the monthly mortgage payment is no longer a sacred concept in many American households. ... When times are tight, consumers put paying for their cars first. Then the credit cards will be paid. The once-mighty mortgage has slipped to No. 3. ...

Why have cars taken the top priority?

We believe that it's primarily because consumers need their cars to get to work or to seek employment. Being able to seek employment is particularly relevant because of how long people have been out of work.

Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can't use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you.

But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren't involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you're looking at 10 to 20 months before you'll be evicted.

And you have to look at the idea of equity. In the "traditional" hierarchy, you'd say that people valued their homes above all else. But this is slightly inaccurate: They valued their equity above all else. When equity evaporates for consumers, the home is not so important.

Is this a permanent change in our attitudes?

We don't think so. We think that when home values become stable, when unemployment returns to healthier levels ... we would expect those traditional forces to return to normal. It's not that consumers have become irrational; they're actually rational. ...

I would also add that the expected consequences of default on a mortgage, e.g. the ability to get credit in the future, aren't as large as they used to be.