Taxpayers and investors are mostly on the hook this time, not banks.

By Wolf Richter for WOLF STREET.

Mortgage balances rose by $131 billion (+1.0%) in Q2 from Q1, and by $416 billion (+3.3%) year-over-year, to $12.9 trillion, according to the Household Debt and Credit Report from the New York Fed, based on Equifax credit report data.

Back in 2021 and 2022, the year-over-year increases were in the 8-10% range. Since then, demand for existing homes has plunged despite spiking supply, while demand for new houses has been soft despite a supply glut.

In general, mortgage balances rise when homeowners sell their home with a partially or fully paid-off mortgage, while the buyer gets a new mortgage for most of the purchase price. Mortgage balances also rise with cash-out refinancing of existing mortgages. And they rise when homebuilders and condo developers sell a new home (population growth, employment growth = income growth and more homes), and the buyer uses a mortgage to fund the purchase. Rising home prices accelerate that process.

Mortgage principal payments and mortgage payoffs by homeowners who don’t sell (to invest a bonus check, for example) work in the opposite direction on mortgage balances.

Here come the HELOCs: +30% since Q1 2021.

Balances of Home Equity Lines of Credit jumped by 2.2% quarter-to-quarter, and by 8.2% year-over-year, to $411 billion. Since the beginning of 2021, HELOC balances have surged by 30%.

During the Housing Bust, HELOCs did a lot of additional damage, and lots of lessons were learned at the time. Then mortgage rates plunged, and cash-out refinancings at lower mortgage rates took off, replacing HELOC activity. As a result, HELOC balances declined for 13 years.

So now, even after the 30% surge from those very low levels, HELOC balances are still relatively low. These are the actual balances drawn on HELOCs:

HELOCs come with a second lien on the home, and if homeowners default on the HELOC while keeping the first-lien mortgage current, they can still end up in foreclosure.

In addition, after a foreclosure, when the first-lien lender takes the home, lenders of the HELOC can pursue homeowners with deficiency judgements for the unpaid HELOC balances even in the 12 “nonrecourse” states, including California, that don’t allow deficiency judgements on first-lien mortgages.

So HELOCs come with some extra risks for borrowers and lenders – which is also why lenders charge a higher rate for HELOCs than for first-lien mortgages.

But HELOC interest rates are a lot lower than interest rates on credit cards, which are unsecured debts and can come with 20% or 30%-plus interest rates.

So homeowners can use HELOCs as stand-by lines of credit with no balance and no interest cost (though same fees may apply), to have the cash for big projects at a lower cost than borrowing on their credit cards. Or they can use it to pay off their credit cards and save some money on interest.

The burden of housing debt: Housing-debt-to-Income Ratio.

A classic way of evaluating any borrowers’ ability to manage the burden of debt is the debt-to-income ratio, or a debt-to-cash-flow ratio. In terms of households, “disposable income” roughly represents cash flow after payroll taxes that is available to spend on the costs of living, such as housing, food, fuel, healthcare, etc., and debt payments.

Disposable income is household income from all sources except capital gains, minus payroll taxes: So income from after-tax wages, plus income from interest, dividends, rentals, farm income, small business income, transfer payments from the government, etc.

The housing-debt-to-disposable-income ratio accounts for the growth in the population and income (more households and higher incomes per household) in relationship to the mortgage debt.

Disposable income rose faster than mortgage and HELOC balances in Q2:

• QoQ: disposable income +1.25%, mortgage & HELOCs +1.06%.
• YoY: disposable income +4.5%, mortgage & HELOCs +3.5%.

So the housing-debt-to-income ratio declined to 59.2% in Q2, the lowest ratio in the data going back to 2003, except for four quarters during the free-money-stimulus era that had inflated disposable income into absurdity.

From the chart below, it is obvious where the problem was in the run-up to the mortgage crisis that nearly blew up the financial system in 2008: households overindebted with housing debt, with the housing-debt-to-income ratio exceeding 90%. Now it’s below 60%.

Taxpayers and investors are mostly on the hook, not banks.

One of the most consequential changes coming out of the Financial Crisis was the transfer of mortgage risk to taxpayers. There won’t be another mortgage crisis, as far as banks is concerned. And taxpayers don’t care as long as their taxes don’t go up.

Commercial banks only held $2.65 trillion, or 19.9%, of the $13.35 trillion in total mortgage debt, HELOC debt, and second-lien mortgage debt outstanding, according to Federal Reserve data on bank balance sheets.

Government entities held, guaranteed, and securitized $9.2 trillion in single-family residential mortgages at the end of Q2, according to Ginnie Mae data. The resulting MBS, which have essentially zero credit risk because taxpayers took that on for a fee, were sold to investors such as bond funds, pension funds, the Federal Reserve, banks, etc. If borrowers default, the taxpayer has to eat the loss.

The share of government-guaranteed mortgages by total unpaid principal outstanding:

• Fannie Mae: 38.8%
• Freddie Mac: 33.2%
• Ginnie Mae: 28.0%

The remaining $1.5 trillion in mortgages that banks didn’t keep on their books and that the government didn’t guarantee, such as jumbo mortgages, have been packaged into “private label” MBS and sold to institutional investors around the globe, such as pension funds and bond funds, and it’s these investors that carry the credit risk for those mortgages, and not banks.

So far, so good: delinquencies and foreclosures dipped and are low.

Serious delinquencies ticked down in Q2 and are low for both, mortgages and HELOCs.

Mortgage balances that were 90 days or more delinquent dipped to 0.82% of mortgage balances outstanding, which is below the historic lows before the Free-Money era (red in the chart below).

HELOC balances that were 90 days or more delinquent dipped to 0.85% in Q2, below the prepandemic range and a little higher than in the pre-2006 years (blue).

Foreclosures declined and are low. The number of consumers with foreclosures in Q2 dipped to 52,800, and remained below the range of the Good Times in 2018-2019 of 65,000 to 90,000.

The mortgage forbearance programs and foreclosure bans during the pandemic, and other government programs for government mortgages, made foreclosures essentially impossible, and the number of foreclosures fell to near zero.

Most of these programs have ended, and foreclosures have risen from the near-zero levels of the Free-Money era, which is forming the “frying-pan pattern,” that has been cropping up in a lot of data.

What is keeping foreclosures still low currently is that home prices exploded during the Free-Money era – see: The Most Splendid Housing Bubbles in America, June 2025: The Price Drops & Gains in 33 Large Expensive Metros. As a result, most struggling homeowners can sell their home for more than they owe on it, pay off the mortgage, and exit with some cash.

But in markets where home prices have already dropped significantly, this option is slipping away from the relatively small number of buyers who’d bought near the peak.

And in case you missed it yesterday: Household Debts, Debt-to-Income Ratio, Serious Delinquencies, Collections, Foreclosures, Bankruptcies: Our Drunken Sailors’ Debts in Q2 2025

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WOLF STREET FEATURE: Daily Market Insights by Chris Vermeulen, Chief Investment Officer, TheTechnicalTraders.com.