The proliferation of no-money-down home loans over the past few years, coupled with the current housing downturn, is giving rise to a new mentality: People will risk losing their homes while doing everything to keep their credit cards.
”This is the biggest surprise we’re seeing,” said Elizabeth Schomburg, senior vice president of the Family Credit Counseling Service in Chicago. ”People are actually coming to us with situations where they are current on their credit cards but are in foreclosure.”
That partly explains why credit-card delinquencies have remained low — despite the recent signs of trending up — while banks and mortgage lenders are repossessing a record number of homes after years of lending excesses.
As some consumers see it, they need to hang onto their plastic as hard as they can, especially at a time when faltering house prices are making it harder for people to access credit through refinancing or borrowing against homes.
However, U.S. consumers’ increasing reliance on revolving credit also means banks are more vulnerable to credit-card default in the event of a broader economic slowdown, posing another threat to Wall Street, which is already spooked by escalating home-loan defaults.
Just like mortgages, the receivables generated by credit cards are often packaged into securities and sold to investors worldwide.