Business Week has an article Time to Give Up the House about how people who couldn't afford a house aren't paying their mortgage, they're paying their credit card debt.
So, now all the companies that lend to subprime people are suffering and the people themselves are suffering. There are a couple theories as to why subprime lenders react different than prime lenders:
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.
Yet those same subprime borrowers actually caught up on their credit cards over the same period. The share who were 30 days or more late on their cards fell from 32% to around 24% between early 2003 and late 2006. (That's for borrowers with Experian credit scores under 620; people with scores over 680 are considered prime borrowers.)
Little "Skin in the Game"
Fears of widespread fallout from subprime borrowing have spread in recent days. Early this year, it appeared that the troubles would be contained to relatively small lenders, such as NovaStar Financial (NFI), Accredited Home Lenders (LEND), and New Century Financial (NEW) (see BusinessWeek.com, 2/22/07, "A Painful Hiss from the Subprime Balloon"). But in the past few days, Bear Stearns (BSC) has run into trouble with two hedge funds it manages that have taken on subprime exposure. That prompted a broad market selloff on June 20, with the Dow Jones industrial average down 146 points (see BusinessWeek.com, 6/20/07, "Stocks Swoon on Subprime Fears").
- They need the credit cards to survive so they pay them first
- They know that foreclosure takes a while to proceed
- They are paying their least expensive debts first
The upside of the mortgage insanity is that some people, who might not have perfect records have been given a chance at home ownership and made good on it. They are on their way to success.
Most of the people though, were sold on empty promises, and now, with bankruptcy laws more onerous, the suffering mounts.