Mortgage balances increased by nearly $1 trillion last year

U.S. mortgage balances increased by almost $1 trillion in 2022, even as new originations slowed considerably throughout the year, according to the Federal Reserve Bank of New York.

Home loan balances rose $254 million during the fourth quarter, pushing the overall outstanding total to $11.9 trillion at the end of December, up from $10.9 trillion a year earlier. The quarterly addition was almost 10% lower than the $282 million increase recorded in the prior three months. 

Despite new-loan activity peaking in 2021, the shift from refinances to purchases in the last year alongside elevated home values helped keep the level of balances up. 

"Prices have come down a little bit, but they're still pretty high relative to a few years ago," New York Fed researchers said. "And so, purchase originations now are adding significantly to the balance outstanding."

Home price growth had surged to a record annual pace of more than 20% last spring, but pressure from interest rate hikes and slowing demand brought it down to single-digit percentages toward the end of the year. By December, the pace of growth had fallen to 6.9% annually according to a recent report from CoreLogic.

In the final three months of the year, the rise in mortgage balances accounted for almost two-thirds of the total growth of $394 billion in newly accumulated consumer debt nationwide. Credit card balances made up $61 billion of the amount, followed by auto loans at $28 million.

Newfound interest in home equity lines of credit and similar products helped lead HELOC balances higher by $14 million - the largest quarter-to-quarter gain in over a decade. In a year that saw several nonbanks introduce home equity loans to offset the downturn in refinances, the HELOC amount finished the year with an outstanding total of $336 billion. 

Out of the total $16.9 trillion worth of debt held by U.S. consumers at the end of 2022, housing related loans made up $12.3 trillion, or 73%. 

The higher ratio of purchases to refinances in the past year also pushed the median credit score of new mortgage borrowers down to 766, returning to pre-COVID levels. Refinances are typically associated with higher credit scores because those borrowers already have a mortgage to their name.

Although the score declined from the previous quarter and a series high of 788 from early 2021, credit quality among borrowers remained healthy "and reflects continuing high lending standards," according to the New York Fed.

But a small uptick of 0.15% over the quarter in the share of mortgages defaulting or transitioning from early-stage to a more serious state of delinquency of 90 days or more past due appeared as well. The increase, though, came in at a lower rate than credit cards and auto loans, which were up by 0.6% and 0.4%, respectively.

"Some of this, of course, may be just some reversion to the pre-pandemic norms, and we should note that we're seeing these increases in delinquency from historic lows," bank researchers said. 

While mortgage related distress has not climbed back up to pre-COVID levels and delinquencies for other consumer loans remains low, some problems may be hiding behind the numbers, which has the potential to lead to trouble for the U.S. economy.

"We're looking now at a delinquency rate that's rising in spite of a pretty strong labor market, and so that in and of itself is a little bit of a concern," New York Fed researchers said.

"If the unemployment rate goes up sharply, it'll continue to rise. If your employment rate stays at these very low historical levels. Will delinquencies still continue?"