Low-income borrowers are increasingly missing payments on their auto loans and credit cards, and missed the boat on ultra-low mortgage rates, according to a new report from the Federal Reserve Bank of New York.
The New York Fed used anonymized Equifax
EFX,
credit report data as well as income data from the 2016 Census Bureau American Community Survey. The report is the third in a series looking at how low-income households handle their finances and access credit.
“Low- and moderate-income debt holders are struggling in today’s post-pandemic period,” the authors said in the report published on Thursday. “We see this in rising early delinquencies in auto and credit card debt.”
The authors found that low-income borrowers began missing payments on their auto and credit card debt in 2022, pushing delinquencies up beyond pre-pandemic levels.
“Financial stress appears to have risen,” the authors stated in the report.
The median auto loan origination balance for a borrower in a low-income area was $24,700 in the third-quarter of 2023, compared to $18,500 at the end of 2019.
Additionally, many low-income households also missed out on the mortgage refinancing boom during the pandemic, when many homeowners jumped at the chance to switch to historically low mortgage rates, the New York Fed authors said.
“Most low-income homeowners did not refinance during the mortgage refinancing boom, missing an opportunity to lower monthly mortgage payments,” they noted.
“Lower-income areas barely saw any increase in refinanced mortgages,” New York Fed says, as compared with borrowers in higher-income areas.
Only 24% of mortgages in low-income areas were refinanced between 2020 and 2021, the report found, far lower than the 42% of mortgages in high-income areas.
About 23% of homeowners in the U.S. have a mortgage rate below 3%, according to government data analyzed by Redfin, and that rate was likely obtained either during the pandemic or prior. Current mortgage rates are far higher, averaging at 6.6%, according to Freddie Mac.
Lower-income areas also have lower levels of homeownership, the NY Fed said, and the share of the population with a mortgage is lower.
And in low-income areas, 57% of households are rent-burdened, versus 44% of households in high-income areas. Households are defined as rent- burdened if they pay more than 30% of their monthly income on their rent.
