Consumers prioritize auto over mortgage payments
What are the drivers behind this consumer shift in the loan payment hierarchy to pre-pandemic norms and is it likely to last?
We previously shared that during the first couple years of the pandemic, for the first time in our decades-long research on this topic, consumers prioritized mortgage payments above auto loan payments. In all previous periods analyzed, consumers prioritized auto loans instead. This inverting of the payment hierarchy was likely driven by the fact that early in the pandemic, consumers could avoid delinquency on their mortgage loan by requesting a CARES Act mandated accommodation. Furthermore, home price appreciation accelerated after the onset of the pandemic and enabled homeowners to build equity in their home, a financial asset that homeowners would likely want to protect by making payments and avoiding foreclosure.
Now that we are further removed from the pandemic-driven spike in mortgage payment accommodations, our research shows that auto loan payments are being once again prioritized over mortgage, reverting to pre-pandemic norms. Both auto and mortgage continue to be higher in the payment hierarchy than unsecured products such as credit cards. (In our analysis dating back to 2005, auto and mortgage payments have been consistently prioritized over credit card payments.)
In Figure 1, we analyzed the borrower population – consumers with at least one active auto loan and mortgage loan and at least one 90+ day delinquency on an auto or mortgage loan. We then calculated the percent of that consumer population that had a 90+ day delinquency on only their mortgage loan, a 90+ day delinquency on only their auto loan, or had a 90+ day delinquency on both their auto and mortgage loan. We studied this on three pre-pandemic performance periods (pre-Great Recession 2005-2007, post-Great Recession 2010-2012, and pre-pandemic 2015-2017) as well as three pandemic-era periods (April 2020-2022, Oct 2021-2022, and April 2022-April 2023).
Figure 1
For April 2022-2023, the blue bar represents the 44% of consumers that had a 90+ day mortgage delinquency, but no 90+ auto delinquency. The gray bar represents the 43% of this borrower population that had a 90+ day auto loan delinquency but no 90+ mortgage loan delinquency, and the orange bar represents the 13% that had both a 90+ day auto and 90+ mortgage delinquency.
When the blue bar is higher than the gray bar (as we see in the first 3 time periods and April 2022-April 2023), it means that consumers in this segment prioritized auto payments to their lender over mortgage loan payments, resulting in more frequent delinquencies observed on mortgages than auto loans.
Conversely, when the gray bar is higher than the blue bar (as we see in the 2020-2022 and 2021-2022 periods), it means that consumers have prioritized making their mortgage payments to lenders over their auto payments.
For April 2022-2023, the blue bar is slightly higher than the gray bar, so while the payment hierarchy between mortgage and auto is very close, borrowers prioritized auto payments over mortgage, and the trend in recent time periods has been shifting back to pre-pandemic norms.
It is important to note that loan payment hierarchy can vary by FICO® Score. For example, borrowers with FICO Scores of 700+ still prioritize mortgage over auto loan payment to their lenders in the April 2022-2023 period as seen in Figure 2, a reversal relative to what was observed for the total population in the 2022-2023 period as seen in Figure 1.
Figure 2
Many high scoring borrowers have substantial equity in their homes due to increases in home prices since the start of the pandemic and likely want to protect the financial investment in their home. Therefore, it is not surprising to see the high scoring consumer population prioritizing payments on mortgage loans over auto loan payments.
Overall, the pandemic-related shift in loan payment hierarchy has proven to be temporary, since CARES Act mortgage accommodations are no longer mandated. It took a relatively short period of time for the loan payment hierarchy to revert to historical norms, and as we move further away from the unique conditions of pandemic-era accommodations, it would not be surprising for the trend of auto loan payments being prioritized above mortgage loan payments to continue.
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