The rate at which borrowers have been marked consistently late on their mortgages is on track to increase by half a percentage point next year, according to TransUnion.
The 60-day-plus delinquency rate will rise to 1.4% by year-end 2023 from an estimated 0.9% this year, the credit bureau forecast. This year’s expected delinquency rate is marginally higher than last year’s 0.8%.
The two-month delinquencies tracked by TransUnion typically average around 2% and at their height during the Great Recession’s housing crash they got into the 7% range, said Joe Mellman, mortgage business leader at TransUnion, in an interview.
TransUnion expects delinquencies will rise partly because employment is expected to be weaker next year as a result of the ongoing push from monetary policymakers to raise rates and slow inflation.
While a recent report showing relative cooling in inflation was expected to decrease the magnitude of the short-term rate hikes and possibly even lead to an eventual pause at deadline, TransUnion expects pressure on the market through 2023.
“The other piece that may be equally as strong is the last two years we’ve had abnormally low delinquency levels, largely as a factor of forbearance programs because of the pandemic,” Mellman said.
Because of those programs, which allowed borrowers to temporarily put payments and typical credit reporting of delinquencies on hold for hardships, loan performance numbers have been artificially low.
So while the annual increases forecast for year-end 2022 and 2023 mark a change in the directional trend for delinquencies, it still leaves loan performance historically strong.
“Coming back up to 1.4% is more a function of reaching back to a normal situation where if you don’t pay your mortgage, you actually will get marked delinquent,” Mellman said. “We just didn’t have that over the last couple years.”
The two-month delinquencies tracked by TransUnion typically average around 2% and at their height during the Great Recession’s housing crash they got into the 7% range, said Mellman.
Federal Reserve officials currently have been signaling that they’re looking for at least a minor housing correction to occur as part of their quest to quell inflation. While housing and mortgages might not be under as much pressure as they were during the financial crisis, expectations that home valuations will continue to weaken a little through next year is part of why TransUnion expects upward pressure on them.
“Home prices ticking down a little bit, some people being slightly underwater, that certainly contributes a little bit to it,” Mellman said.
Despite this, Mellman does foresee that enough home equity will be left to continue fueling increases in second lien lending, albeit to less of a degree than this year.
The number of newly originated home equity lines of credit and closed-end second liens tracked by units is expected to end 2022 up 41.9% from last year. TransUnion’s forecast calls for a gain of another 24% in 2023. Last year, home equity lending was up 10.6% after rebounding from a drop of nearly the same magnitude during the 2020 pandemic.
TransUnion forecasts that first-lien mortgage lenders will close out this year with their unit volume down 57% due to the first prolonged rise in rates seen in many years. Declines will likely continue next year, but to a lesser extent. The company expects to see a 19% drop in this category for 2023, and forecasts that refinance loans will drop to an 18-year low next year.