When homeowners experience financial difficulties, which bills do they pay and which do they skip?  Many households have missed mortgage payments and have experienced foreclosure since the housing market bust beginning in 2006.  But little is known about how households, faced with falling house values and other financial stresses, juggle sources of credit as they develop measurable mortgage distress.  This paper uses unique data derived from credit reports to explore how homeowners manage credit in the midst of financial difficulties.  Traditionally, mortgages have been viewed as the last credit line on which borrowers stop payments.  We investigate, among other issues, how that conventional wisdom held up through the Great Recession.

We start with data from the Federal Reserve Bank of New York’s Consumer Credit Panel that track individual credit records since 1999.  These quarterly data are matched with loan-level data from CoreLogic’s LoanPerformance database, resulting in a large sample of individuals that is representative of homeowners with securitized non-prime mortgages.  The matched data allow us to dynamically estimate a homeowner’s equity using local home price indices, and the geocodes allow us to investigate the roles of local labor market conditions and neighborhood characteristics at the census block level. 

First, we describe the usage of non-housing debt, especially credit cards, in the quarters before and after the onset of mortgage distress.  We examine the circumstances and characteristics of homeowners who apply for new debt and/or increase the use of existing lines of credit.  Throughout, we detail how our results differ by whether the borrower is solely an owner-occupier or likely an owner of investment properties.  While we cannot directly observe job loss, we use county level labor market indicators as proxies.

Second, we describe repayment patterns for existing non-housing loans, such as student loans, automobile loans and credit cards.  In particular, we pay attention to the evolution of home equity and contrast a borrower’s behavior before and after negative equity occurs.  We document the extent to which repayment of mortgages are prioritized over alternate loans, and whether this varies by state bankruptcy and loan recourse laws.  The repayment of other loans but not an underwater mortgage likely suggests strategic default behavior.  We also examine whether the initiation of foreclosure proceedings by the lender allows borrowers to more readily repay other debt as they can essentially live rent free until the foreclosure and eviction is complete.

Third, we explore how homeowners with multiple mortgages prioritize these obligations and how that is related to the extent of home equity.  In particular, do mortgagors focus on repaying the primary mortgage at the expense of secondary ones?  And do homeowners with open-ended home equity lines of credit start using these upon financial distress?

Households have access to a wide range of credit sources.  Faced with financial difficulties, they must decide which bills to pay and when.  This paper documents how they have done so in response to the dynamics of the boom and bust.