The American recession is changing one of the golden tenets of personal finance: keep paying your mortgage or you may lose your home.

Thanks to high unemployment and home prices that make it hardly worth selling, a growing number of US consumers are doing the unthinkable: paying their credit card bills instead of their mortgages.

According to TransUnion, a credit-checker operating mainly in America, Asia and Russia, the percentage of Americans who are up-to-date on their credit cards but behind on mortgage instalments increased to 6.6% in the third quarter of 2009, up from 4.3% in the first quarter of 2008.

And the share of consumers making mortgage payments on time but behind on their credit cards moved in the opposite direction, sliding from 4.1% to 3.6% over the same period.

Said Ezra Becker of TransUnion: “This is a clear manifestation of the dynamics that lead up to the recession and the recession itself.”

Before the housing crisis, bankers assumed that homeowners would do everything they could to keep their mortgage in good order, even if that meant falling behind on other bills.

“It used to be that the mortgage was sacrosanct,” says Keith Gumbinger of HSH, America’s largest publisher of consumer loan information. “This sort of thing is what keeps bankers awake at night.”

It’s hard to fault the new logic. After all, newspapers on both sides of the Atlantic have been saying for years that borrowers should first pay off the loans charging the highest interest. And for many, that is the credit card.

The credit card company is going to be the first to hit you with penalties, and millions of people cannot do without their plastic to see themselves through yet another pressurised month.

There is also far less emotional attachment to a home in America than in the UK, where so many people have been brought up to regard their homes as giant cash machines, not to be let go at any price.

Falling home prices, high unemployment and tight consumer credit have persuaded many US consumers to elevate credit card payments above mortgage bills.

The housing bust is at the root of the problem. When home prices fell roughly 30% from their peak in the second quarter of 2006 to the third quarter of last year, a great number of borrowers lost heart as they watched the value of their homes drop below what they owed on their mortgages: the dreaded negative equity.

Without equity in their homes, American borrowers are more likely to walk.

“They don’t see any value in putting money into an asset that will probably never regain enough value to offset the mortgage,” says Celia Chen, of Moody’s Economy.com.

Becker blames the new mood on the banks making it too easy to become a homeowner.

He said: “A lot of people were able to get their homes with little or no down payments, so there was no real sense of ‘I worked really hard to achieve home ownership.’ Instead, it came very easy.”

But while walking away from a mortgage has become less daunting, the tighter credit environment has made credit cards more difficult to obtain, so consumers have become increasingly concerned with hanging on to the cards they have.

“It is hard to operate in our society without a credit card today,” Gumbinger said.

And US government anti-foreclosure efforts have significantly extended the time between a borrower’s initial mortgage default notice and actual foreclosure.

Edward Pinto, a former chief credit officer at the giant lender Fannie Mae, said: “The last thing you have to worry about at this juncture is paying your mortgage, because by the time they foreclose it could be six months, 12 months, or a year and a half down the road.”

But if you go a couple months without paying your credit card bill, the bank is going to close your account.

A new pressure group has thrust its way into the headlines. It’s called Save our Savers, and, like Mom and apple pie, supporting savers has got to be a good thing.

This group is no building society members’ action group pressing for higher rates, or Low Incomes Reform Group seeking a better deal on benefits for those who manage to salt away a few coppers.

No, this lot include a bunch of high-table Tories, such as Lord Naseby, former Deputy Speaker of the House of Commons; Andrew Haldenby, director and co-founder of the right-wing think tank Reform; Nick Bosanquet, a consultant director of Reform; Harry Macmillan, a retired oil and gas industry executive; Roger Martin, retired former London partner in PricewaterhouseCoopers; Peter Duckworth, a bioscience entrepreneur who sold his firm in August 2007 for £37.7m, and - inexplicably – a bearded vicar called John Strain and the TV nutritionist Amanda Ursell.

So, basically, a group of people most of whom have a fat wedge in their back pockets, to the right of the political spectrum and not much in common with your average building society saver or pensioner on housing benefit.

No matter. Backing a better deal for savers has got to be applauded, hasn’t it?

Yes, unless the campaign has less to do with promoting the ideals of thrift than rubbishing the present Government’s economic record – which is admittedly lamentable, but it doesn’t need a special interest group to point that out.

Also, launching a campaign for savings just now couldn’t be worse timed. The economy is fragile. If rates for savers were increased, rates for borrowers would accordingly have to go up too – very likely killing stone dead any recovery in the housing market, sparking more repossessions and finishing off the already gasping small business fraternity.

Were we all to embrace a puritanical zeal for thrift, we would wear our shoes till the soles fell off and never replace our coats until they were threadbare – and certainly not waste money on electronic goods, new kitchens and visits to the cinema. Thereby killing off the economic recovery before it has hardly begun and adding another couple of million to the dole queues.

Unpalatable as it may be – and as a net saver I certainly hate it – supporting borrowers at the expense of savers is the right thing to do in the current situation.

America likes to boast about the virtues of the free market: stand on your own feet, be independent, lead your own life, no one to tell you what to do, land of the free and all that.

But when recession hits it is a lot harder for many people to do any of those things without help. And, among those lucky enough not to need help, that does not compute.

We have seen it this year with the US healthcare debate. It was a major plank of Barack Obama’s election campaign and, to his credit, he has pressed ahead with it in the teeth of the economic blizzard.

And what has he got in return? Accusations of socialism, the bogey word that sends many Americans either running scared or manning the barricades, and town hall meetings scarred with bile and exaggeration.

Bob Packham, 63, of Santa Monica recently lost his job with an audiovisual company, leaving him and his wife Roselee dependent on her small salary from a part-time position at their synagogue.

They’re drawing on savings to pay the mortgage on their town house, and being sucked into an all-too-common medical insurance trap.

Roselee has Crohn’s disease, and they are paying through the nose for a policy with the American Association of Retired Persons (AARP), the very body set up to protect the aged.

Bob wrote:
“This year the insurer has collected $975 a month from the Packhams and Bob’s former employer – that’s $11,700 (₤7,300) a year for a plan with a $9,800 excess.

“As December begins, I have not yet hit the deductible (excess),” says Bob.
So this year, Bob and Roselee’s medical coverage will have cost $20,000, adding together premiums and excess, and their insurance company will have paid nothing in benefit.

Bob adds: “That is more than I will pay for my mortgage, more than I paid last year in federal and state income taxes, more than groceries, auto insurance, religious dues. In fact, it is the most expensive item in my budget.”

And next year the premium will rise $1,100 per month.

It’s called denial, said Roselee, and Bob had to agree.

“I’m scared,” Roselee admitted. I know how she feels. I pay roughly the same, with a similar excess.

A couple of months ago my insurer was kind enough (or feeling sufficiently guilty) to get someone from the company to phone me to inform me that the premium would be rising from November. By 17.5%, when inflation and interest rates are near-zero.

He was very nice, quite apologetic, wanted to let us know, unavoidable and all that. But no escape.

US insurance companies are basically bolstering their profits because they expect the Healthcare Bill, when it eventually takes effect, to make life a lot harder for them. And not before time.

My policy is basically disaster insurance, in case I or my partner have some accident or illness that puts us in hospital for months. Without insurance, that can drive the victim to bankruptcy.

No National Health Service safety net, however run-down and tatty it may be. At least it’s there.

It’s no surprise that 50 million Americans are uninsured, out of a population of 300 million. That is the gap Obama is trying to bridge, but the Bill has been so watered down with compromises that some people are still going to be left out in the cold.

The Packhams count themselves lucky their two adult children are off their hands and Roselee’s dad lives with them, paying them $500 a month. Roselee started collecting Social Security a bit on the early side, and they think they can scrape by until they turn 65 and switch to Medicare – which, in return for modest premiums, ironically operates very much like the NHS.

The poor – those earning under $23,000 a year – are normally covered by Medicaid, another NHS-lite scheme.

But for millions in the middle, any improvement Obama can get away with can’t come soon enough.

The Bank of England claims that British consumers are hoarding their cash – literally. In a speech in Washington, Andrew Bailey, executive director for banking services, attributed a shortage of £50 notes to the UK population’s distrust of the recession-stricken banking system and a preference for concealing what little cash they have left under the bed.

The Bank also says it wants to get more £5 notes into circulation.

I don’t doubt for a minute that nervous pensioners whose local Post Office has closed during the Government’s axe attack on the network over the past two years are keeping more cash behind the clock. I find it entirely credible that the average drug lord or people trafficker prefers to deal in readies. And with interest rates at rock bottom, tax rates set to soar and banks and building societies tottering, maybe it really is better for ordinary citizens to keep their money where they can see it.

“Sustained low inflation has increased confidence in the real value of the currency, while more recently demand for banknotes has risen during this recession, and particularly for high denomination notes, reflecting loss of confidence in banks and very low interest rates,” Mr. Bailey is reported as saying.

It’s not just the banks we have lost confidence in. What we are losing confidence in is the ability of the Bank and the Government to keep a grip on the money supply, something that so-called “quantitative easing” has done nothing to restore.

As the Government struggles to devalue its debt, inflation is surely lurking just around the corner.

How convenient that we apparently “need” more banknotes in circulation. Just watch those printing presses roll!

I’m having some problems with shared appreciation mortgages.

No, I haven’t got one, but it’s the sums I can’t get my head round and why there seems to be a court case about them.

The High Court has just granted a Group Litigation Order to holders of these mortgages, who are suing Lloyds (which has taken over responsibility for loans granted by Bank of Scotland) and Barclays over the terms of the loans, which they say are unfair.

According to the website of the lawyers handling the case:

“SAMs originated in the US in the 1970’s. In the mid-1990’s, SAMs were developed for the UK market by a partnership between Swiss Bank Corporation (now UBS) and BOS in order to create securities linked to the UK property market, which were then offered to investors in the capital markets as bonds. Barclays also developed a similar scheme offered through Barclays Capital. In total, about £500m worth of these bonds were created.”

They say: “Under these schemes, which were only sold in 1997 and 1998 before being withdrawn from the market, borrowers took out loans secured against their homes, at a zero or a reduced fixed rate of interest. However, on repayment of these loans, borrowers also had to pay an additional charge which in most cases worked out at or close to 75% of the increase in the value of the property during the lifetime of the loan (the appreciation).

“Despite the fall in house prices since late 2007, the steep rise in house prices in the 10 years between 1997 and 2007 has meant that with zero interest SAMs the Lender’s share of the appreciation is now an average of 4.4 times the amount borrowed, equivalent to an average interest rate of 35-40% per annum on a simple interest basis. With fixed interest SAMs, the average interest rate is even greater at 42- 52% per annum on a simple interest basis.

“In a typical case, such as a house worth £100,000 in 1998, which is now worth £300,000, the figures are startling.

“If the homeowners borrowed £25,000 at a zero rate of interest, they now have to pay a total of £175,000 on redemption (£25,000 plus £150,000, being 75% of the £200,000 appreciation). If the homeowners borrowed £75,000 at a fixed rate of interest, they now have to pay a total of £225,000 on redemption (£75,000 plus £150,000 of the appreciation), as well as about £50,000 in interest payments over the term of the loan – in all a staggering £275,000 or thereabouts.”

But just a minute. Look at the figures again. The lawyers give the example of a house worth £100,000 in 1998 and now worth £300,000 with a loan taken out against it of £25,000 – 25% of the 1998 value.

If, instead of taking out a SAM, the householder had simply borrowed the money from the bank and the debt had rolled up at a fixed rate of 12% for 12 years with no repayments during the period, the compound interest bill – and it would be a compound interest calculation that you would need to use if no repayments were made – would come to £133,756.

In 1998 base rate reached 7.5%, so 12% for equity release doesn’t seem unduly extortionate for the period because equity release has always been more expensive than an ordinary repayment loan. Adding in the principal borrowed – £25,000 – the amount now owing would be £158,756. That is not really all that far off the £175,000 being asked of the SAMs clients who want to cash in their chips now.

It doesn’t seem such a bad deal either when you consider that the bank had to hedge against the client’s longevity and the risk of a fall in house prices and in reality no one knew that prices would rise as steeply as they did in the intervening period.

Back to the lawyers’ figures: borrowing £75,000 with an interest payment of just £50,000 over 11 or 12 years looks like stunningly good value. No wonder the bank feels entitled to a share of the appreciation of the property as well.

An interest rate of 12% over 12 years would have meant repayments of £292,198 – actually more than householders are now being asked to find if they want to redeem the loan.

Where the borrowers seem to have gone wrong is that they ever considered moving house. Equity release of any kind should be a last resort for the retired – and, to put it bluntly, a last resort before you die or go into care.

These people are looking at the loan as something they need to repay. The only way to look at equity release is that you never repay it. Whatever scheme you opt for, you should consider it as selling part of your home to a third party.

Where the banks went wrong was to estimate house price growth at 4.5% a year, whereas in fact it has been more like 11.7%. But this was an estimate – a guess, since no one can predict the future – and borrowers could have taken a different view of property prices if they were so minded.

There are always winners and losers in any market, people who sell at the bottom or at the top. Prices could have increased by just 2% a year – or even fallen - as far as anyone knew way back then.

If you sold a house a few years ago and it has rocketed since in price, you can’t return to the buyer and ask for some more money because you have now decided after consideration that the deal you did all that time ago was not a good one.

It is unfortunate the elderly people have become trapped in their homes. One should not overlook the personal distress that this causes. My heart goes out to them on a humanitarian level and it is right that the banks should look at individual cases of hardship.

It is, of course, scandalous if these people were badly advised about how SAMs work and clients were able to take them out too early in their lifetimes without understanding the product.

If the product was explained, the clients insisted on taking out the loan when they still had more than a dozen years of life ahead of them and they simply misjudged the housing market, there is sadly no question of the contracts being unfair. The case against the banks will be found to be without merit.