TransUnion Flags ‘K-Shaped’ Credit Divide As Mortgage Delinquencies Climb, Refi Activity Surges

The U.S. consumer credit market is splitting more sharply along credit lines, with higher-credit borrowers gaining ground while lower-credit consumers face mounting financial pressure — a divide that is now showing up in mortgage performance and origination trends.

New research from TransUnion, released alongside its Q1 2026 Credit Industry Insights Report, finds a “K-shaped” divergence in borrower health, where both super prime and subprime segments are expanding while middle tiers continue to contract.

That shift is beginning to surface in mortgage activity, even as overall volume rebounds.

Refi Boom Lifts Volume, But Delinquencies Keep Rising

Mortgage originations increased 12.8% year over year in Q4 2025 to approximately 1.39 million loans, driven largely by a surge in refinancing. Rate-and-term refinances jumped 90% annually, while cash-out refinances rose 28%.

Home equity lending also expanded, with total originations up 12.3% year over year. HELOCs led growth, climbing 20%, while closed-end second liens posted more modest gains.

At the same time, mortgage performance is weakening.

Consumer-level mortgage delinquencies (60+ days past due) rose to 1.57% in Q4 2025 — the 16th consecutive quarter of year-over-year increases. FHA loans accounted for nearly half of all delinquent mortgages, underscoring continued stress among lower-credit borrowers.

Satyan Merchant, senior vice president of automotive and mortgage at TransUnion, said the data reflects a market “moving in two directions at once,” with borrower mix and evolving risk dynamics requiring closer monitoring by lenders.

Borrower Quality Is Splitting And The Middle Is Shrinking

The divergence is being driven by a reshaping of the credit spectrum.

Between 2019 and 2025, the share of consumers in the super prime tier rose to 40.7%, an increase of 380 basis points, with roughly 15 million additional consumers moving into the lowest-risk category. Meanwhile, prime and near-prime segments declined, and subprime share has recently begun ticking higher again.

At the same time, debt burdens are rising across the board, but not evenly.

Non-mortgage debt-to-income (DTI) ratios increased just 29 basis points for super prime borrowers over that period, compared to 176 basis points for near-prime and 143 basis points for subprime consumers.

That gap highlights a growing imbalance in financial resilience.

Higher-credit borrowers are generally better positioned to absorb rising balances, while non-prime consumers are seeing required payments consume a larger share of income — increasing the risk of delinquency and limiting flexibility for homeownership or refinancing.

Jason Laky, TransUnion EVP of financial services, said the divide is becoming increasingly visible in borrower risk profiles, with stronger consumers gaining ground while below-prime borrowers show signs of mounting stress.

Credit Is Still Flowing, But It’s Being Repriced

Despite rising pressure, lenders have not pulled back from lower-credit borrowers.

Bankcard originations reached a record 21.9 million in Q4 2025, up 13% year over year, driven largely by growth at both the super prime and subprime ends of the spectrum.

But exposure is being managed more tightly.

Credit lines for subprime borrowers have grown more modestly than for higher-credit consumers, signaling a more measured approach to risk. Deep subprime originations have increased, but typically with smaller limits — allowing lenders to maintain access while controlling portfolio exposure.

Similar risk-calibration trends are evident across credit products, including mortgage and home equity activity, as lenders balance demand with tightening affordability conditions.

New Credit Models Could Widen The Gap

The timing of the divergence is notable.

As previously reported by NMP, the Federal Housing Finance Agency has approved a transition to newer credit scoring models, including VantageScore 4.0 and FICO 10T, which incorporate trended data to give lenders a more complete view of how borrowers manage debt over time.

TransUnion has backed the shift. In an April statement, the company applauded moves by FHFA and the U.S. Department of Housing and Urban Development to advance VantageScore 4.0 in mortgage lending, saying it could expand access to credit and increase competition among scoring models. Satyan Merchant said the transition could help “expand opportunities for creditworthy borrowers.”

In a market already splitting along credit lines, that added visibility may further separate borrowers who are improving from those showing early signs of stress.

What It Means For LOs

The borrower pool is no longer moving in one direction, it’s fragmenting.

Higher-credit borrowers are driving refinance activity and maintaining stronger performance metrics, while non-prime borrowers remain active but face rising payment pressure and growing delinquency risk.

That split is likely to shape underwriting, product mix, and pull-through rates in the months ahead, particularly as affordability constraints persist and credit models evolve.