Banks are mostly off the hook this time; risks were shifted to taxpayers and investors.
By Wolf Richter for WOLF STREET.
Mortgage balances rose by $137 billion (+1.1%) in Q3 from Q2, and by $482 billion (+3.8%) year-over-year, to $13.1 trillion, according to the Household Debt and Credit Report from the New York Fed, based on Equifax credit report data.
Growth in mortgage balances is a net of several factors, a significant one being the growth of the housing stock when buyers finance the purchase of newly constructed homes. Mortgage balances also increase, in terms of existing homes, by the difference between buyers’ new mortgages and sellers’ paid-off mortgages, if any (many sellers don’t have mortgages); balances also increase by the cash-out portion of newly refinanced mortgages and by new second-lien mortgages.
Conversely, mortgage balances are reduced by the principal portion of mortgage payments and other mortgage paydowns or payoffs; and by mortgage wrecks that cause mortgage balances to be written off – few of them currently, but a lot during the Mortgage Crisis:
Here come the HELOCs: +33% since Q1 2021.
Balances of Home Equity Lines of Credit jumped by 2.7% quarter-to-quarter, and by 9.0% year-over-year, to $422 billion. Since the low point in Q1 of 2021, HELOC balances have surged by 33%.
HELOCs did some damage during the Housing Bust, and lessons were learned about their risks. But more importantly, mortgage rates plunged ever lower through 2021, and cash-out refinancings dominated the equity-extraction industry. As a result, HELOC balances declined for 13 years.
Despite the 33% surge off the 2021 bottom, HELOC balances are still relatively low. HELOCs are lines of credit, and many of them are unused, just sitting there as a standby source of funding. But the balances here are actual balances drawn on HELOCs:
The risks of HELOCs involve that second lien they put on the home. If homeowners default on the HELOC while keeping the first-lien mortgage current, they can still end up in foreclosure.
Also HELOCs are full recourse even in the 12 states, including California, where nonrecourse mortgages are standard, and where lenders, after a foreclosure sale, cannot pursue former homeowners with deficiency judgements on the first-lien mortgage. But they can pursue former homeowners for the balance of the HELOC.
And HELOCs come with higher interest rates as lenders face the additional risks that come with second-lien mortgages, as the holder of the first-lien mortgage gets paid first in a foreclosure sale, and often there is nothing left over for the second-lien holder.
On the plus side for the borrower: HELOC interest rates are a lot lower than interest rates on credit cards or personal loans, and can even be lower than unsubsidized auto loans.
And homeowners can use it as a stand-by line of credit with no balance and no interest cost (though fees may apply), to have instant access to the cash, if suddenly needed, at a lower cost than borrowing on their credit cards. This includes people with substantial investments who don’t want to sell those investments to fund other projects.
The burden of housing debt: Housing-debt-to-Income Ratio.
The debt-to-income ratio is a common way of evaluating the burden of a debt. With households, we can use the debt-to-disposable-income ratio.
“Disposable income,” released by the Bureau of Economic Analysis, includes 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. It roughly represents cash flow after payroll taxes that is available to spend on the costs of living and debt service.
Due to the government shutdown, the BEA has not yet released disposable income for September. To get Q3 disposable income, we can use the data for July and August and estimate September based on average growth year-to-date.
The housing debt for this ratio includes mortgage debt and HELOC debt.
The housing-debt-to-disposable income ratio in Q3 inched up to 58.6%, just a hair higher than in Q2, which had been the lowest on record, except the four quarters during the pandemic when stimulus funds distorted household incomes into absurdity.
It’s glaringly obvious what led to the Mortgage Crisis that was a big part of the Financial Crisis: Households overindebted themselves with housing debt. By Q1 2007, the housing-debt-to-income ratio exceeded 90%!
Who’s on the hook this time?
Among the most important changes resulting from the Financial Crisis was the transfer of mortgage risk from banks to taxpayers. There won’t be another mortgage crisis for banks. They’re largely off the hook.
Banks and credit unions are on the hook for $2.7 trillion in mortgages, HELOCs, and second-lien mortgages, according to Federal Reserve data on bank balance sheets. That amounts to only 19.7% of the $13.5 trillion in mortgage and HELOC debt.
The government is on the hook for $9.1 trillion of single-family mortgages that were securitized into MBS and sold to investors, according to Ginnie Mae data. If borrowers default, the government eats the loss. For investors, these MBS have a similar near-zero credit risk as Treasury securities. The investors include bond funds, pension funds, the Federal Reserve ($2.1 trillion and shrinking), banks, mortgage REITs, etc.
And subprime-rated mortgage debt is insured by the government through the FHA.
The share of government-guaranteed single-family mortgages outstanding:
- Fannie Mae: 38.6%
- Freddie Mac: 33.1%
- Ginnie Mae: 28.3%
Investors are on the hook for $1.7 trillion of residential mortgages, such as jumbo mortgages that didn’t qualify for government backing. These mortgages have been packaged into “private label” MBS and sold to institutional investors around the globe, such as pension funds and bond funds. It’s these investors that carry the credit risk for those mortgages. Banks are off the hook.
Delinquencies and foreclosures dipped and are low.
Serious delinquency rates – 90 days or more delinquent – were unchanged for mortgages at 0.8% (red in the chart below) and edged down for HELOCs to 0.8% (blue). These are very low delinquency rates.
Foreclosures are very low. The number of consumers with foreclosures in Q3 rose to 54,760, well below the low end of the 65,000-to-90,000 range of the Good Times in 2018-2019, and far below the number of foreclosures in prior years.
The infamous frying-pan pattern, as we call it here, was formed as a result of the era of mortgage-forbearance and foreclosure bans, when foreclosures were essentially impossible and foreclosures fell to near zero; and then, as rules loosened, foreclosures began to edge higher from those near-zero levels but remain well below the prior times. The resulting line of this drop and then the rise looks like a frying pan. This frying-pan pattern has cropped up in a lot of delinquency charts as well.
And in case you missed it yesterday: Household Debts, Debt-to-Income Ratio, Delinquencies, Collections, Foreclosures, and Bankruptcies of our (not so) Drunken Sailors in Q3 2025
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Good report. We know how this story will end. There are already almost half a million 1-4s underwater. When the correction really gets rolling, there will be millions.
People who have a 3% mortgage or even a under 4% mortgage don’t really care about being underwater on price. They’re going to protect that mortgage like a gift from God.
It’s the people who bought at a high price with a high rate over the last two years… and there aren’t all that many of them. But even they will keep making their mortgage payments unless they lose their jobs for a long time and run out of money. And we aren’t there yet.
Wonder what the debt to income looks like for just households who bought since mortgage rates went back to normalish.. have to imagine that’s the forward looking picture at this point. Well offset currently by purchases pre 2023.
Some households have zero debt and some households have lots of debt and some household have moderate amounts of debt. And there are always some who default on their mortgages. That’s always the case and not new. It’s only the household with lots of debt that are at risk. That has always been the case.
But when you want to know whether something can damage the economy overall, you need to look at the aggregate debts and aggregate incomes. And you can see that the economy overall was getting pushed into trouble in 2005-2007 by this explosion of mortgage debt that far outran income growth.
According to the YouTube, everyone is just going to pay off their 30 yr in 3-5 years by getting a HELOC and using some razzmatazz known as velocity banking. What could possibly go wrong with that?