New Consumer "Payment Hierarchy"

Credit Card Bills Trump Mortgage Payments

I attended a private dinner this week where the featured speaker, a senior executive at FICO, offered a wide range of comments. Since the talk was off-the-record, I won't mention the individual's name, but the insights were fascinating.

In a nutshell, FICO is observing a sea change in how consumers prioritize their debts.

Twenty years ago, here's how it looked:

1. Mortgage
2. Car payment
3. Utilities
4. Credit Cards

Today, that hierarchy has literally been turned upside down:

1. Credit Cards
2. Car payment
3. Utilities
4. Mortgage

To say the least, this change has huge implications for housing, and the economy generally.

Two conclusions seem inescapable:

--The risk of continued mortgage defaults is quite high, especially in locations where homeowners are deeply underwater (i.e., their home is worth less than their mortgage). According to the executive, the % of underwater mortgages nationally is now 40%(!).

--The U.S. consumer is tapped out, and especially vulnerable to anything that makes installment debt (credit cards) less available and/or more expensive. Which is pretty much what's happening now.

When you're living off your credit cards, it's safe to say that any financial "cushion" you once had is already gone.

The executive was optimistic that the Federal Reserve was on top of things, and reacting appropriately to the economic crisis; less so that Congress would surmount politics, and spend and tax appropriately.

Silver Linings (Kind of)

Silver linings? The executive cited three (kind of):

--Per above, solving today's economic challenges isn't a question of knowing what to do -- there's actually a surprising consensus amongst policymakers about what's needed (I've noted this on previous posts). Rather, it's having the political resolve to do it (the ball's in Congress' court, not the Federal Reserve's).

--While the ranks of consumers with low FICO scores is swelling, so is the number of people with high FICO scores. The executive called this phenomenon a "flattening out of the bell curve"; the explanation is that many consumers are spending more conservatively, paring their debt, etc. as a result of the financial crisis.

--Everyone's mailbox is a lot emptier these days without all the junk mail, credit card solicitations (have you noticed?).

P.S.: It's too off-color for this blog, but Tom Wolfe has a hilarious, updated version of the "first base, second base" vernacular that every high school boy knows. FYI, "first base" is still kissing -- everything else is different. You'll have to read his novel, "I am Charlotte Simmons" to find out the rest.