Americans’ debt balances continued to compound in 2022 as inflation put pressure on budgets and the cost of borrowing increased. Aggregate household debt, which includes all outstanding credit market debt held by consumers, increased by $394 billion in the fourth quarter of 2022 alone, according to the Federal Reserve Bank of New York‘s Q4 Household Debt and Credit report — and mortgage balances were no small part of the equation.
Per the report, mortgage balances drove the uptick in household debt during the fourth quarter, with an increase of $254 billion compared to Q3. This was due, at least in part, to higher mortgage rates resulting in higher monthly home loan payments. Mortgage balances were also up year over year, totaling $11.92 trillion by the end of December.
This marked a total annual increase of nearly $1 trillion for mortgage balances in 2022.
The fourth quarter origination volume also dropped closer to pre-pandemic levels, according to the Fed report, with newly originated mortgages accounting for about $498 billion of the mortgage balance debt during the quarter. That’s a decline of over $130 billion in mortgage originations compared to Q3 2022, when originations stood at $633 billion.
In addition, the share of current debt becoming delinquent increased in the fourth quarter for nearly all debt types, an indicator that household budgets are being stretched to the limit due to issues with inflation, higher borrowing costs and other economic stressors.
“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” said Wilbert van der Klaauw, economic research advisor at the New York Fed.
Homeowners also continued to tap into record-levels of equity in their homes during Q4, which could be an indicator that homeowners are relying more heavily on borrowing to keep up with debt and other financial obligations.
Home equity lines of credit (HELOC) balances increased by $14 billion during the fourth quarter, according to the report, while HELOC limits increased by $32 billion. That’s a significant increase in limits compared to Q3, when HELOC limits were flat.
The uptick in Q4 HELOC balances marks the third consecutive quarterly increase — and the largest uptick in HELOC balances in more than a decade. The total outstanding HELOC balance is now $336 billion, per the report.
While increased HELOC utilization was responsible for at least part of the uptick in the outstanding HELOC balance during Q4, it’s likely that the recent increases to the Fed rate also played a part. Unlike fixed-rate home equity loans, HELOCs normally carry variable interest rates, and, in turn, borrowers’ balances can be impacted by rate fluctuations.
In addition, the number of homeowners who are seriously delinquent on their mortgage payments also increased quarter over quarter. Per the report, mortgage loans considered in “serious delinquency,” meaning the loans are late by 90 days or more, increased to a rate of 0.57%.
But while seriously delinquent mortgages have increased, foreclosures have stayed low. The foreclosure moratoria has been lifted nationwide, but only about 34,000 homeowners had new foreclosure notations on their credit reports in Q4. Still, that rate is a slight uptick from Q3, when about 28,500 homeowners had new foreclosure notations on their credit reports.
The median credit score of borrowers with newly originated mortgages also declined in Q4, per the report. During the fourth quarter, the median credit score of borrowers with newly originated mortgages was 766, down about 22 points from the high of 788 in the first quarter of 2021.
The rise in household debt coincides with the Federal Reserve’s aggressive campaign to lower inflation with a series of increases to the Fed rate. The Fed has raised its benchmark rate multiple times over the last year, with the latest hike of 25 bps occurring in early February.
These rate hikes have had a significant impact on the cost of borrowing and on the housing market in general. As of Feb. 16, mortgage rates hovered near 7% — with further Fed rate hikes anticipated for 2023.
