American Debt: Mortgage Debt Reaches $10.04 Trillion in Q4 2020

Mortgage balances climbed $182 billion in the fourth quarter of 2020 to $10.04 trillion, according to the latest data from the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York. Housing debt now totals $10.39 trillion, further eclipsing the $9.99 trillion peak we saw in the third quarter of 2008. "Newly originated mortgages, which include refinances, reached a record high of $1.2 trillion, surpassing in nominal terms the volumes seen during the historic refinance boom in the third quarter of 2003," the New York Fed reported.

Household or consumer debt and mortgage balances have steadily increased for several years. Now above the 2008 peak, they continue to reach new highs. Higher mortgage balances are said to be indicative of greater recovery or have been less affected by the crisis in the first place.

Mortgage Debt Seems Like a Good Bet for Lenders

The median credit score of borrowers for new mortgages remained stable in the fourth quarter of 2020 to 786, reflecting a high share of refinances—still in the very good range.

Even better, the percent of seriously delinquent mortgages—those with no payments in 90 days or more—continued to improve, albeit slightly. After home-equity debt, mortgage debt has the lowest delinquency rate of any type of household debt. The flow of mortgages going into serious delinquency was 0.6% in Q4 of 2020, compared to 1.1% in the fourth period of 2019.

TransUnion measures more-than-90-day mortgage delinquency rates, using different data than the Federal Reserve, which uses Consumer Credit Panel/Equifax data. According to the agency, the number of delinquent mortgage accounts continues to drop on a year-over-year basis. The most recent data released by TransUnion showed the percentage of delinquent accounts dropped from 1.16% in Q4 2019 to 0.83% in Q4 2020. Keep in mind that the current rate of delinquency includes deferrals, frozen accounts, and past due payments reported as a result of the COVID-19 pandemic.

Mortgage Debt Fuels Total Household Debt

Mortgage debt is the largest component of total household debt, which rose $206 billion to reach an all-time high of $14.56 trillion. Mortgage balances make up 69% of total household debt.

Mortgage originations, which include both new mortgages and refinances, increased from $752 billion in the fourth quarter of 2019 to $1.2 trillion in Q4 of 2020. That falls in line with the trend of existing home sales, which grew 5.6%, in 2020, the most since before the Great Recession according to the National Association of Realtors (NAR).

Average mortgage debt per borrower, according to TransUnion, stood at $220,224 in the fourth quarter of 2020. The total number of mortgage accounts is up to 50.5 million—an increase from the 50.1 million accounts reported in the first quarter of 2019. According to the agency, borrowers have been able to afford higher payments due to the low-interest-rate environment.

Where Are Mortgage Rates Going?

Mortgage rates are at some of their lowest points, according to Kiplinger. The 30-year fixed mortgage rate dropped to 2.7% in January 2021, which is the lowest it ever hit since Freddie Mac started surveying rates in 1971. If you haven't locked in a rate by now, you may see an increase—but not by much. The group suggests that rates may start to climb slightly in the future, despite the Fed's recommendations to keep short-term rates at near zero. The group suggests that the 10-year Treasury rate, currently at 1.3% could rise to almost 2% by the end of 2021.

What Does Increasing Mortgage Debt Mean?

Is the rise in household debt a good thing, or does it mean that people are overextending themselves again and another crash is imminent? According to the International Monetary Fund (IMF), rising household debt, which includes mortgages, is a boon to the economy. That's because it boosts economic growth and drives unemployment down, especially in developed nations like the United States.

The reason behind this is the environment. Because interest rates are so low, consumers are enticed to take on more debt. Increased regulations—especially after the financial crisis—are keeping things in check. Since lenders tightened up their borrowing requirements following the Great Recession, the chances of consumers defaulting on their debt are much lower than they once were.

The Bottom Line

Rising mortgage balances in the fourth quarter of 2020 don’t appear to be a cause for alarm, as they were when the housing bubble was inflating and the Great Recession was brewing. Fewer consumers are delinquent on their loans, many of those who are delinquent are catching up and foreclosures are at record lows. As the year progresses it will be interesting to see how tight inventory, rising interest rates, and the tax bill affect the housing market and mortgage borrowers.