Delinquencies fell in second quarter

August 6, 2024

Household debt rose by 0.6% to a total of $17.8 trillion in the second quarter of 2024, nearly half the pace of the first quarter, according to the Federal Reserve Bank of New York’s Household Debt and Credit report. Mortgage debt accounted for about 75% of the increase at $77 billion, though originations remained extremely subdued given higher mortgage rates in the second quarter. Credit card debt added $27 billion after declining in the first quarter, while auto debt added a tepid $10 billion. Home equity lines of credit (HELOCs) added $4 billion and moved up to $40 billion year-over-year as HELOCs continued their upswing. Just student debt was down $10 billion.   

The report indicates that delinquencies (of any duration) slipped to 3.2% of total balances from 3.3% in the first quarter; that marks the first decline in delinquencies since the fourth quarter 2022 when delinquencies hit their cycle low of 2.5%. The 2010s average was 6.7%.

Mortgage debt increased by just $77 billion or 0.6%, the slowest pace since the second quarter of 2023. Mortgage originations fell to $374 billion, the lowest since the first quarter of 2023, with the majority of those originations going to consumers with credit scores above 720, though originations with less than 720 did tick up slightly from the first quarter. Higher rates through most of the second quarter hit home sales, but expectations of more rate cuts this year than previously assumed should bring down mortgage rates and spur originations.

Transition into delinquency for mortgages, those newly 30 or more days delinquent, increased slightly to 3.4% in the second quarter from 3.2% in the first quarter, the highest since the pandemic. However, both new delinquencies and serious delinquencies (90 or more days without payment) are below pre-pandemic levels.

At the same time, after nearly 13 years of declining, HELOCs have continued to rebound this year. HELOCs have become more attractive to tap equity given that by the end of 2023, nearly 70% of mortgages outstanding were set to 3 percentage points lower than the prevailing rate. That makes mortgage refinancing much less attractive as a way to utilize home equity. According to the New York Federal Reserve Bank accompanying blog post, HELOC balances have risen 20 percent since 2021, with about 57% going to borrowers 50 and older, 24% going to borrowers in their 40s and 19% going to younger borrowers. That trend is not surprising given that HELOCs tend to be originated to homeowners with more significant home equity, something that is built over the course of a mortgage. Credit limits on the HELOCs are fairly evenly split, but most have limits of less than $100,000. Newly delinquent payments for HELOCs moved the opposite direction as mortgages in the second quarter; new delinquencies of 30-plus days edged lower to 2.1% and serious delinquencies fell to 0.4%.   

Credit card balances increased by $27 billion in Q2 after falling in the first quarter. Credit card interest rates saw their first lower reading in May since the Fed began to hike rates; that will no doubt help borrowers who have been feeling pinched. As pointed out by the New York Fed in the first quarter report, lower credit card utilization was a sign of stress in the first quarter; those who were maxing out their credit limits were showing the largest increases in delinquencies. 

Delinquencies in credit cards are still rising but that has slowed. New 30-plus day delinquencies increased to 9.1% from 8.9% in the first quarter, still above the pre-pandemic level of 7%. Serious delinquencies increased to 10.9% of balances from 10.7%. That is up over two percentage points from the pre-pandemic level. Credit cards have a faster turnover and so those borrowers in distress should get some help from markets front-running the Fed.

Auto debt increased by $10 billion as higher rates continued to hit consumers while a cyber attack on some 50,000 vehicle dealers in June exacerbated problems in sales; dealers could not complete transactions. While auto loans were another category that was seeing increased stress, delinquencies and defaults in the category were flat during the quarter. New delinquencies remained elevated above their pre-pandemic level at 8.0%, the same as the previous quarter, while serious delinquencies were below their pre-pandemic level at 4.4%. While the actual total amount of debt was subdued, originations for cars did pick up as vehicle sellers sweetened their deals; originations were concentrated among those with the highest credit scores, but like mortgages there were some increases in those with lower credit scores that puts those categories back into a normal range for their shares of originations.  

The student loan environment remains murky as the pause of penalties for delinquent payments continues until October 2024. That means we will not see the impact of the end of pandemic forbearance until we receive the fourth quarter data in early 2025. In addition, the third quarter will be difficult to assess; those enrolled in the new income-driven repayment plan were on forbearance as their payments were re-calculated. Balances on student loans fell while delinquencies and defaults were flat.