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The Reprioritization of Consumer Debt


We're robbing Peter to pay Paul -- straying far from a suatinable recovery.

A fundamental cornerstone to the American financial system has been the belief that, in good times and in bad, consumers would pay their mortgage first and everything else second.

Recent data no longer support this.

As most Minyans know well, mortgage delinquencies and defaults across all categories of borrowers continue to reach new heights. At the same time, though, the credit card industry is reporting that delinquencies and charge-offs have stabilized.

This isn't normal -- at least from a historical perspective. (Traditionally mortgage delinquencies peak prior to credit cards).

This morning's Wall Street Journal suggests that "moral contagion" may be playing some part in this behavioral change. (Financially distressed and/or underwater homeowners are suspending mortgage payments in anticipation of being offered restructured terms.) And I suspect that increasingly a significant amount is pure necessity: Families must eat.

I'll leave it others to root out all of the causes of the change, but the result is clear: People aren't paying their mortgages at a time when they're paying their credit card bills.

The questions this raises, however, are disturbing.

For example, in thinking about our 2009 economic recovery, how much GDP growth over the past nine months was really a function of the reallocation of mortgage payments to consumer spending?

And looking ahead to 2010, what happens to the economy when consumers have fully exhausted the cash flow "windfall" of free, albeit temporary, housing?

Further, what does all of this say about the future of home prices, as well as the ultimate cost to the government (as the backstop for Fannie Mae (FNM), Freddie Mac (FRE), the FHA, and the Federal Home Loan Bank System)?

And finally, looking even longer term, what does this mean for future mortgage rates in America if mortgage debt is the last, rather than the first bill paid?

I can't underestimate the importance of this issue. It cuts across America socially, economically, and politically. If, as the data suggest, millions of Americans have stopped paying their mortgages to put food on the table and gas in their car, the underpinning of our economy is at great risk.

The reprioritization of payments doesn't equal a sustainable recovery.
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