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Credit Card Debt Absent the Mortgage Bubble

posted by Adam Levitin

We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we'd be seeing much higher levels of credit card debt (and that's where we're headed).

The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

This has an important implication that has escaped notice.

But for so many people tapping into the home piggybank in recent years, we would be seeing far higher levels of credit card debt (and defaults). Now that the home piggybank is empty, credit card defaults are running up fast. But credit card debt is actually much lower than it would otherwise be, but for the home mortgage bubble. And while a default on a credit card doesn’t cost you your home, the interest runs up much faster than on a mortgage.

To the extent that we’re already concerned about the level of credit card debt in the US, shudder to think what it would look like without the mortgage bubble. Maybe consumers would have purchased fewer flat screen TVs and less gas for the car and milk for the kids if they had to pay for it with high cost credit card credit rather than with low cost mortgage credit. But I suspect we would still have seen a lot of the same spending, so instead of facing a foreclosure crisis, we would instead be facing a much more pronounced version of the credit card debt problem. The future would be here now.

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