home loan finance blog
It seems that more and more Americans are falling behind on their debt. This is not just mortgages and subprime borrowers. People are falling behind on credit cards, car loans and overdraft lines of credit. And things do not look like they are going to get better any time soon.
So what is the underlying cause of this increasing delinquency on all different types of debt? You may have already guessed it, its the slowing housing market. You see when the housing market was on fire, Americans were using their homes like giant ATM machines.
People would go out, buy themselves anything and everything they could get their hands on and just charge it to the old credit card. When they ran out of room on their credit cards they would call their mortgage loan officer and just refinance all that debt into a nice new low rate mortgage.
The booming housing market was basically carrying the economy. While wages were failing to keep up with inflation, people needed a way to continue to buy, buy, buy. Every year homeowners found a huge deposit of new equity in their favorite ATM. So off they went to take out some more spending money.
It was the best of times. Interest rates were low, the housing market just kept going up and up and up. Like the New Economy many people thought the housing boom was never going to end. But, just like the New Economy every market has cycles and the housing market came to the end of its upward cycle.
Now when someone finds themselves to be tapped out on their credit cards they no longer can look to their home for those big equity deposits. In some cases where housing prices have dropped, many homeowners are seeing an unexpected withdrawal of equity from their ATM.
With no additional equity in their home to help them refinance their debt, many homeowners cant make their monthly debt payments. We saw most of the problem in the subprime mortgage market, but now we are hearing rumblings of delinquencies in the prime mortgage market.
Delinquencies on consumer credit, such as credit cards and car loans are going to spike up in the coming months. When a homeowner has less money coming in than going out, they start to rob from Peter to pay Paul. In most cases homeowners pay their mortgage first and everything else second.
Think about it, what is more important, paying your mortgage and keeping a roof over your head or paying you credit card bill so you can buy that nice pair of shoes you wanted. Most people would pay the mortgage, although I have seen some people opt for the shoes.
Whatever the case may be we are going to see more and more people who will not be able to pay their bills and delinquencies on debt will continue to rise. Will all of these late payments cause a recession? Only time will tell.