What kind of idiot pays off unsecured credit first?
The kind of idiot who knows that the laws will now come down on them harder for not paying the credit cards than for defaulting on the mortgage. Foreclosure takes time, a credit card company laying waste to your FICO score is nearly instant.
When I read the report this past March that highlighted the number of first month and early month defaults on sub-prime mortgages, that’s was my first inkling that these oh-so-smart bankers really didn’t do their homework. The mortgage lending industry was completely gob-smacked to find that people with low FICO scores were paying off their cards first, mortgage second. They bundled and sold vast tranches of this sub-prime debt on the assumption (there’s that word — ‘ass’ ‘u’ ‘me’) that the default rate would remain low as in past years.
They didn’t factor in the bankruptcy law changes in 2005, higher interest rates, etc.
How do the laws "come down harder"? What laws are you talking about? I realize your credit score will be crap, but that's bound to happen anyway when you have more that's supposed to go out every month than comes in.
The 2005 bankruptcy laws being changed are a huge factor in this fiasco, but, here’s another interesting aspect: Wall Street Buy Back Agreements.
Mortgages Sold To Wall Street
“To reduce the risk of each individual mortgage, lenders package mortgages together and sell them on Wall Street. For example, a lender may sell a package of ten mortgages to Wall Street investors. The investors will benefit by collecting the mortgage interest. Of those ten, two may be subprime or of a higher risk level. Due to the fact that there are eight other mortgages packaged into the deal, it reduces the risk.
What has happened to many banks is that in their agreements with Wall Street investors, if there is a certain default ratio, they would need to buy back the loans. With the declining housing market, adjusting interest rates and other market factors, the default ratio has increased significantly. Wall Street investors enforced the buy back agreements which made banks buy back billions of dollars in loans. This effectively eliminated the bank’s ability lend and put them into bankruptcy.”