Unprecedented Increase: Consumer Debt Surges Past $17 Trillion Despite Dip in Mortgage Interest – What’s Driving This Trend?

Total Consumer Debt Reaches Record High of $17 Trillion in Q1 2023

Introduction

Total consumer debt hit a fresh new high in the first quarter of 2023, pushing past $17 trillion even amid a sharp pullback in home borrowing.

Borrowing Across All Categories Increase

The total for borrowing across all categories hit $17.05 trillion, an increase of nearly $150 billion, or 0.9% during the January-to-March period, the New York Federal Reserve reported Monday. That took total indebtedness up about $2.9 trillion from the pre-Covid period ending in 2019.

Mortgage Originations Reach Lowest Level Since 2014

That increase came even though new mortgage originations, including refinancings, totaled just $323.5 billion, the lowest level since the second quarter of 2014. The total was 35% lower than in the fourth quarter of 2022 and 62% below the same period a year ago.

New Home Loans Decline Due to Interest Rate Increases

New home loans peaked at $1.22 trillion in the second quarter of 2021 and have been falling since as interest rates have increased. A series of Fed rate cuts helped push 30-year mortgage rates to a low around 2.65% in January 2021.

Higher Interest Rates Push Total Mortgage Debt Up

But rates are now around 6.4%, as the central bank has enacted 10 rate increases totaling 5 percentage points to fight inflation, according to central bank data through Fannie Mae. The higher rates helped push total mortgage debt to $12.04 trillion, up 0.1 percentage point from the fourth quarter.

The End of the Refinancing Boom

Borrowers had used the previously lower rates both to buy new homes and to refinance, the latter seeing a boom that appears to have ended.

“The mortgage refinancing boom is over, but its impact will be seen for decades to come,” Andrew Haughwout, director of household and public policy research at the New York Fed, said in a statement accompanying the report.

Impact of Mortgage Refinancing on Borrowers

Fed data shows that about 14 million mortgages were refinanced during the pandemic period starting in March 2020. Some 64% were considered “rate refinances,” or homeowners looking to take advantage of lower borrowing costs. Average savings totaled about $220 per month for those borrowers, according to the New York Fed.

“As a result of significant equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funding for spending or paydowns in other debt categories,” Haughwout said.

Rising Delinquency Rates

Despite rising rates, mortgage foreclosures remained low. Delinquency rates for all debt increased, up 0.6 percentage point for credit cards to 6.5% and 0.2 percentage point for auto loans to 6.9%. Total delinquency rates moved up 0.2 percentage point to 3%, the highest since the third quarter of 2020.

Student Loan and Auto Loan Debt Increase

Student loan debt edged higher to $1.6 trillion and auto loans nudged up as well to 1.56 trillion.

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