HELOC Balances Surge 45% Since 2021 as Housing Debt Burden Eases

Mortgage balances fell by $74 billion, or 0.6%, in the second quarter to $13.12 trillion, according to the New York Fed's Household Debt and Credit Report, which draws on Equifax data. The decline was unusual, driven by a temporary gap in mortgage reporting due to a servicing transfer, the New York Fed said. Behind that technical glitch, mortgage originations remain stalled as existing-home sales languish and new-home sales fizzle despite builder incentives and price cuts. Year-over-year, mortgage balances rose 1.4%, the smallest gain since 2016.

Home equity lines of credit tell a different story. HELOC balances jumped 2.8% in Q2 and 11.6% from a year earlier to $459 billion. Since the low point in Q1 2021, HELOC balances have surged 45%. These are drawn balances, not the unused portion of credit lines. The shift reflects a simple math trade-off: homeowners who want to tap equity face a choice between refinancing a 3% first mortgage into a 6% loan or keeping the cheap first lien and adding a smaller HELOC at 8% or 9%. Increasingly, borrowers choose the HELOC, adding a second lien that increases leverage and, if defaulted on, can trigger foreclosure even if the first mortgage is current.

To gauge the overall housing debt burden, analysts combine mortgages and HELOCs against disposable income, which includes after-tax wages, interest, dividends, rentals, and transfer payments but excludes capital gains. Disposable income has grown faster than housing debt for years, pulling the housing-debt-to-income ratio lower. In Q2, the ratio dipped to 57.4%, the third-lowest on record, behind only Q2 2020 and Q1 2021, when pandemic relief payments distorted the data. For context, the ratio exceeded 90% in 2007 as the mortgage crisis unfolded. The current level suggests households are not overleveraged on housing debt, the New York Fed data show.

Serious delinquencies, defined as 90-plus days past due, remain low. The share of mortgage balances in that category dipped to 0.99% in Q2. For HELOCs, the rate ticked up to 0.99%. Both are roughly where they stood in 2018 and 2019, before the pandemic. Foreclosures edged down to 55,160 in the quarter, still below the low end of the 2018-2019 range and far below pre-crisis levels. The pandemic-era forbearance programs had pushed foreclosures near zero, and they have risen only modestly since.

What could drive a large-scale wave of defaults? The previous housing bust showed that widespread overleverage, combined with a sharp economic shock, was the trigger. Today, the housing debt burden is low, and delinquencies are benign. About 65% of all outstanding mortgages, including nearly all subprime loans, are backed by government entities – Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration, and the Department of Veterans Affairs. These agencies package mortgages into agency mortgage-backed securities, absorbing losses if a loan goes bad, effectively transferring credit risk from banks to taxpayers. Agency MBS carry credit risk similar to Treasuries. Investors in private-label MBS, which cover about 15% of mortgages, bear the remaining risk. Banks and credit unions hold less than 20% of housing debt, a share that limits systemic exposure, Federal Reserve data show.

The combination of low household leverage, strong government backing, and manageable delinquency rates suggests the housing market is not building the kind of excess that preceded the 2008 crisis. Still, the surge in HELOC balances adds a layer of junior debt that could amplify losses if a downturn hits. The New York Fed data will be updated in Q3, and the trajectory of HELOC growth will be a key metric to watch.