Skip the mortgage, pay the credit card

NEW YORK (CNNMoney.com) -- Millions of Americans are not only upside down on their mortgage, they also appear to be shunning that monthly payment in favor of meeting their everyday expenses.

In the state of California, for example, more than 10% of credit card-carrying consumers were choosing to pay that bill rather than their mortgage as of last fall, according to a recent study published by the credit reporting agency TransUnion.

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Some cash-strapped consumers are finding that paying the credit card bill or home equity line of credit to be a more sensible option than paying their mortgage.

Borrowers across the country have also been just as anxious to pay down their home equity line of credit rather than their primary mortgage, based on recent figures from the FDIC, if for no other reason but to continue using their house like an ATM.

History has shown that when cash-strapped consumers are trying to make ends meet, the mortgage is often the first thing people stop paying, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

When the U.S. housing market bubble burst, it had that exact effect, shaking up consumers so-called "payment hierarchy."

In good economic times, consumers usually pay the mortgage first, car loan second, and their credit cards and everything else after that.

So with many economists declaring that the recession is likely over, you'd expect more consumers to go back to paying their mortgage first. That's not happening.

The TransUnion study revealed that the number of consumers who were delinquent on their mortgage but current on their credit card stood at 6.6% in the second half of 2009, up from 4.3% at the start of 2008.

Elevated unemployment levels have helped fuel the change in consumer behavior. But other factors are also at work, according to experts.

For most borrowers, paying the credit card or home equity line of credit is simply more feasible than trying to tackle a significantly larger mortgage payment.

Others have gotten wise to the fact that even after they stop making payments on their mortgage, chances are they won't be evicted from their home until much, much later. In states such as Florida, for example, foreclosure proceedings have been known to take as long as 18 months.

More often than not however, struggling homeowners simply want to maintain some access to credit in the event they need to take care of their day-to-day expenses such as groceries or to fix the broken muffler on their car.

Unlike in years past where it was relatively easy for questionable borrowers to secure a credit card or home equity loan, banks now make it much more difficult for borrowers to secure a line of credit, said Ezra Becker, director of consulting and strategy in TransUnion's financial services unit.

Banks have also tried their own programs aimed at getting consumers back on track. Some have attempted modifications on borrowers' primary mortgage and home equity loan.

The nation's four largest banks - Citigroup (C, Fortune 500), Wells Fargo (WFC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) - recently agreed to participate in the Obama administration's Second Lien Modification Program, which aims to stem the rising tide of foreclosures by having banks modify a borrower's second mortgage.

In instances where consumers have loans with two different financial institutions, banks have tried collaborating in order to minimize losses for both the lender and the borrower, said Shelley Leonard, senior vice-president of consumer lender strategy for Lender Processing Services, a provider of mortgage data to the banking industry.

"I think all the banks are interested in the best outcome for the borrower," she said. "In order for that to be achieved, they will have to address the first and second mortgage."

Others have adopted a proactive approach with customers believed to be at risk of faltering on their loan payments, in an effort to mitigate losses.

The Birmingham, Ala.-based Regions Financial (RF, Fortune 500), for example, implemented a financial check-up in late 2007 on some of its largest mortgage holders or those with adjustable-rate mortgages that were poised to reset.

That appeared to have some success as the percentage of loans in the company's mortgage portfolio that were in foreclosure stood at 1.95% at the end of last year, less than half the national and regional average, said Barb Godin, an executive in Regions' consumer credit division.

Consumers are unlikely to stick to such unorthodox financial behavior for good. Experts said that eventually, homeowners will once again start paying their mortgage before everything else.

But for that to happen though, notes Moody's Hoyt, home prices will have to start improving first.