Putting the card before the house

NEW YORK (CNNMoney.com) -- In another symptom of the subprime mortgage meltdown, stressed-out borrowers may be taking care of their credit card bills before making their mortgage payments.

According to a report from consumer credit reporting agency Experian, borrowers with credit scores of 620 or below are 30 days late more often with mortgage payments than with payments on bank-card debt.

Josh Rosner, managing director at financial research firm Graham Fisher & Co., said the data "highlights the level of distress among subprime borrowers and how close they are to the precipice. They need credit cards to make daily purchases, which takes priority over monthly payments like the mortgage."

Linda Haran, director of product management and strategy for Experian's Decision Sciences division, said the data marks a departure from how subprime borrowers acted in the past, when their first priority was to keep mortgage payments current.

The survey noted that historically, consumers have prioritized mortgage debt over credit card debt as they "traditionally view their home as their most valuable asset which should be protected at all costs."

But the current housing slump, in a very fundamental way, has changed the math that governs the way subprime borrowers deal with debt.

Part of it, according to Doug Duncan, chief economist of the Mortgage Bankers Association, is that people have different attitudes about spending. "The real issue is lifestyle," he said.

To maintain spending levels, homeowners, including many subprime borrowers, relied on the equity they built up in their homes. The last housing boom made many homeowners wealthier by building up home equity.

But you can't spend home equity - not until you convert it to cash - which can be done through cash-back refinancings and home equity loans. Many subprime borrowers joined other homeowners in tapping the value of their property through these products, which increased their debt.

When home prices stopped growing, this fragile balancing act collapsed for many subprime borrowers. With their equity tapped out, they found themselves owing more on their mortgage than the home was worth. Their ability to borrow any more cash was gone.

Duncan said that these subprime borrowers with "little skin in the game," have little or nothing to lose if their lenders foreclose on their homes.

They still have to have a car to drive to work, and they still have to buy groceries. Then, it may make good financial sense to pay charge card bills before the mortgage.

Rosner pointed out another reason that borrowers might be more eager to make credit card payments: Credit card companies tend to be better - more dogged -at collecting debt than mortgage servicers.

Consumers who have dealt with phone calls, letters and wage garnishees from credit card collectors in the past may want to avoid repeating the experience.

Finally, subprime borrowers may have been using some of the cash from their home equity loans or cash back refinancings to pay off credit card debt itself, according to Duncan. Home loans have much lower interest rates than credit cards. And most credit counselors will tell borrowers in over their heads to pay down their credit card debt above all else.