A recent report from CoreLogic showed that mortgage delinquencies fell this year to the lowest point in more than a decade, but analysts from TransUnion expect mortgage performance to continue improving next year, leading to record lows in mortgage delinquencies.
TransUnion released its 2018 consumer credit forecast this week, which shows that mortgage delinquencies should fall next year to lowest level since 2005, the first year the credit reporting agency began tracking that figure.
Matt Komos, vice president of research and consulting for TransUnion, said the continued decline in delinquency will be driven by strong employment and rising home prices.
“From a credit performance standpoint, mortgage loan delinquencies are the biggest story,” Komos said. “Serious mortgage delinquency rates are expected to decline materially next year, reaching levels not seen since 2005 when TransUnion began tracking these metrics.”
According to TransUnion’s forecast, the serious mortgage delinquency rate (which TransUnion classifies as 60+ days past due) is expected to drop to 1.65% by the end of 2018, down from a rate of 1.91% during the third quarter of this year.
The credit reporting agency’s report also shows that consumer-level mortgage delinquency rates have now declined in nearly every quarter since peaking at 7.21% in Q1 2010, when there were 60.1 million mortgage accounts.
Over the last several years, that figure dropped, before stabilizing this year.
The total number of accounts fell to a low of 52 million in Q4 2016. According to TransUnion’s data, the current number of accounts is 52.7 million, and has been basically flat over the last three quarters, which indicates roughly an equal number of accounts are being paid off as are being originated.
Over the last five years, the year-end delinquency rate has declined from 4.31% in 2013, to 3.4% in 2014, to 2.46% in 2015, to 2.28% in 2016. This year’s projected year-end delinquency rate is expected to be 1.83%, and TransUnion expects that to fall to 1.65% at the end of 2018.
TransUnion’s reported also listed several other factors for the expected decline in delinquency, including increases to the labor participation rate, median household income, and home equity levels.
TransUnion’s report also provides some of the credit reporting agency’s other views for 2018.
TransUnion believes that mortgage interest rates will rise throughout 2018, leading to further decreases in refinance originations. “Industry forecasts have refi share dropping from 35% in 2017 to 28% in 2018,” TransUnion notes in its report.
Additionally, TransUnion expects a rise in home equity lines of credit due to rising home prices.
TransUnion projects there will be approximately 1.6 million HELOC originations in 2018 and about 10 million through 2022.
“This is in stark contrast to the previous five-year period, when less than half that number were originated—4.8 million HELOCs were opened between 2012 and 2016,” TransUnion noted.
TransUnion believes the three largest uses for these new HELOCs will be:
- Debt consolidation to a lower interest rate
- Financing a large expense, like a home improvement
- Refinancing an existing HELOC or home equity loan
“Rising home prices, solid underwriting criteria, and a strong economy have led to an extremely low level of risk in the mortgage industry, which will likely continue into 2018,” Joe Mellman, senior vice president and TransUnion’s mortgage line of business leader, added.
“While housing demand is expected to remain strong headed into the new year, the question will be how much of a purchase headwind will we face with tight supply of entry-level housing, rising interest rates, and expensive ‘move up’ options,” Mellman said.
“Many existing homeowners, already having refinanced into a low-interest rate mortgage, may be unwilling or unable to ‘move up’ due to how expensive housing has become. That lack of mobility can, in turn, put pressure on the supply of entry-level housing,” Mellman continued.
“Additionally, there is uncertainty regarding the potential impact of current tax reform efforts. One potential upside may be felt in HELOC lending, as more homeowners opt to upgrade their existing housing through home improvement, as opposed to moving into a new home,” Mellman concluded. “Though HELOCs were somewhat forgotten over the past five years, this, combined with record levels of home equity, will likely lead to a HELOC resurgence in the next few years.”
