For generations, homebuyers have had one simple rule drilled into their heads: Whatever happens, keep paying the mortgage. If you don’t, you risk losing your house and all the equity you’ve built up in it.
But for many subprime borrowers, that doesn’t seem to be the rule of thumb anymore. They are now more likely to be late on their mortgage than on their credit card, according to a new study from Experian Group, the Ireland-based company that maintains a huge database of consumer credit histories.
The significance? One explanation could be that many recent subprime homebuyers simply aren’t that worried about losing their homes because they don’t have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.
At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. “People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to paycheck,” says Oliai.
Experian’s study, released June 20, says that the share of subprime borrowers who were 30 days or more late on their mortgages went up from about 32% at the beginning of 2003 to around 36% at the end of 2006—a sign of increasing financial distress.
Many subprime mortgage borrowers “don’t have much skin in the game,” says Douglas Duncan, chief economist of the Mortgage Bankers Assn. Subprime loans that originated in 2004 and 2005—which account for a big share of those now entering delinquency—involved extremely small down payments, Duncan says. “Some people said, ‘Let’s roll the dice and see if we can get a house. And if it doesn’t stick, we’ve still got to have the credit card to keep going and we’ve got to have the car to get to work.'”