Payment-to-income trends seen as mortgage risk indicator

As serious mortgage delinquency rates continue to rise, rising payment-to-income ratios across other credit products could serve as a canary in the coal mine for future problems in making monthly payments, a Transunion report said.

Over two years, serious delinquencies, which Transunion defines as 60 days or more late, while still relatively low, have increased by 38 basis points, to 1.27% for this year's second quarter from 1.14% for the same time in 2024 and 0.89% in 2023. This trend has been seen in information from other sources as well, including the Mortgage Bankers Association.

However, Transunion is making a case for rising PTI ratios for credit card loans, home equity lines of credit and student loans as an indicator that a mortgage borrower is at higher risk of becoming distressed.

The products are different, although credit cards and HELOCs do have some similarities with each other regarding the ability to re-borrow those funds when a consumer pays off all or part of what is due. Credit cards and student loans are unsecured, while HELOCs are backed by the borrower's residence, usually as a second lien behind the first mortgage.

How payment-to-income ratio changes indicate mortgage issues

Rising PTIs for these non-mortgage credit products are "a strong and reliable signal that these borrowers are significantly more likely to experience mortgage delinquency in the future," said Jason Laky, executive vice president and head of financial services at Transunion, in a press release. "Moreover, evolving patterns in credit card usage may provide additional early indicators of emerging financial stress, offering valuable insights for lenders."

But the analysis also noted that rising mortgage PTIs are also "strongly associated" with 60 day or more late payments on their home loans.

Changes in credit card usage patterns, like delinquencies and aggregate excess payment (a measurement of the amount a consumer pays above the minimum due) among borrowers with a rising mortgage PTI ratio "may offer early insights into financial stress," the Transunion study said.

It compared end-quarter credit card PTI in 2023, with 60-day mortgage delinquency rates one year later.

For March 2023, the PTI was 2.18%, while 60-day mortgage lates 12 months later were 42 basis points.

PTI rose by 7 basis points at the end of the second quarter of 2023, with the delinquency rate rising the same time in the next year by 4 basis points. But the gains in the third quarter were 6 basis points and 10 basis points respectively, while for the fourth quarter, they were 2 basis points and 7 basis points higher.

Similar patterns of rising PTI and higher mortgage delinquencies were found for HELOCs and student loans, Transunion added.

Transunion said it suggests as borrowers allocate a greater portion of their income toward paying those other forms of debt down, their ability to stay current on their mortgage is increasingly strained. Common wisdom is that consumers would pay-off their home debt ahead of unsecured loans, but if their stress is extreme, all payments are likely to cease.

What should mortgage servicers be looking at for delinquency trends

Mortgage servicers should be looking at trended cross-wallet data on their customers at least every quarter in order to be aware of any emerging delinquency risk even before the credit score changes, Transunion suggested.

Both Vantagescore 4.0 and FICO 10T use trended data in their score model but Classic FICO does not. (Transunion co-owns the parent company of Vantagescore with Equifax and Experian.)

"Trended credit data can play a critical role in identifying shifts in key attributes such as aggregate excess payment, non-mortgage delinquencies and debt-to-income ratios," said Satyan Merchant, Transunion senior vice president and auto and mortgage business leader.

Having and using this information can allow servicers to pinpoint and contact customers at risk of defaulting, Merchant said.