Category Archives: Risk

Mortgage default risk drops in Q2 2020, despite pandemic, due to home price growth and refinance volume

Milliman today announced the second quarter (Q2) 2020 results of the Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages.

During Q2 2020, the economic component of default risk for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) defied expectations, decreasing for the first time since at least Q3 2019 as a result of home price growth and robust refinance volume. In Q2, approximately 70% of mortgage volume was refinance loans, which are considered lower risk relative to purchase loans. Because of this, and an increased demand for housing, overall default risk for GSE loans decreased, from 1.99% in Q1 2020 to 1.74% in Q2.

Low interest rates have driven homeowners to refinance in record numbers, with 2020 refinance volume exceeding $1 trillion and totaling more than the volume of 2018 and 2019 combined. That, coupled with home price growth, has resulted in an improvement in mortgage default risk in Q2, despite the economic stressors from the COVID-19 pandemic.

For Ginnie Mae acquisitions, the MMDI rate increased from 10.33% in Q1 2020 to 10.61% in Q2 2020, driven mainly by increased refinance volume. Many of these loans were originated through streamlined refinance programs, where a credit score is not provided. A credit score of 600 is conservatively assigned, which increases borrower default risk during heavy refinance periods

The models used in Milliman’s MMDI analysis rely on home prices to forecast default rates, and do not rely on unemployment rates, nor do they have specific adjustments for special legislative actions or programs such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

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Record-setting wildfires put homeowners insurance in jeopardy

As the 2020 wildfire season again exceeds historical norms, insurers and policymakers must turn their attention from the literal fires to the figurative one: the threat—and increasing likelihood—that this escalating wildfire risk will result in a homeowners insurance crisis in the state of California.

For homeowners, insurance is often the last line of defense against losing everything to wildfire. However, for many, this crucial financial backstop is rapidly becoming harder to obtain as insurers reduce their portfolios due to billions in losses and regulatory restrictions on reflecting the true cost of risk in the premiums charged. This withdrawal is creating an untenable situation for many Californians and efforts to address it are becoming an urgent priority for policy makers.

In this article, Milliman professionals explain in more detail the state of home insurance in California and the regulatory efforts to address the issues thus far.

How has COVID-19 affected the U.S. mortgage marketplace?

Now that we are several months into the COVID-19 pandemic, sufficient data exists to analyze its effects on the mortgage market and draw conclusions on the impact this disruption will have on the marketplace for the rest of 2020 and into next year.

The mortgage market started the year with robust origination volume, investor appetite, an expanding credit box, and home price appreciation. The pandemic shifted the scene significantly, triggering steep mortgage rate declines, undocumented forbearances to mortgagees, and a freeze of investor appetite. The Federal Housing Finance Agency also released a proposed rule in advance of recapitalizing and potentially releasing Freddie Mac and Fannie Mae from conservatorship, which has widespread implications for the future of the mortgage market.

In this paper, Milliman’s Nate Gorst and Jonathan Glowacki discuss each development and also discuss the impact of these events on the mortgage and housing market.

Climate change ranks as humanity’s top challenge – now what?

Climate change is one of a number of interconnected risks threatening the stability of the global financial system. This year, for the first time, the World Economic Forum ranked it as the top challenge facing humanity. This issue has not gone away amid COVID-19, which has exposed how actions in one country can have direct consequences for the whole world.

In this article, Milliman’s Neil Cantle and Nancy Watkins, along with The Oracle Partnership’s Peter Kingsley, discuss the role actuaries and insurers can play in tackling climate change following the coronavirus crisis.

Understanding the FHFA’s new refinance fee

In August, the Federal Housing Finance Administration (FHFA) announced an Adverse Market Refinance Fee of 0.50% applicable to refinance mortgages purchased by Freddie Mac and Fannie Mae (the Enterprises). The intent of the fee is to help buffer the Enterprises’ finance from adverse market conditions and to increase their capital positions as the FHFA prepares to release them from conservatorship.

The way this fee may affect the mortgage market and borrowers is not straightforward. In this article, Milliman’s Nicholas Beihoff, Ryan Lindsay, and Jonathan Glowacki provide clarity on the fee and its potential impact. They demonstrate how the fee will likely have a limited impact on borrowers looking to refinance their mortgages into a lower interest rate.

Exploring solutions for student loan debt

The years following high school have always been a time of uncertainty for students choosing to pursue post-secondary education. The choices regarding college and choosing a major have big implications on a student’s career trajectory, not to mention financial situation, for years to come.

The growing uncertainty concerning the format of higher education due to COVID-19, the post-graduate job market, and the long-term impact of student debt leaves many individuals wondering if they will ever earn enough to free themselves from student loan debt.

This landscape presents significant opportunity for insurtechs and traditional insurance carriers to create sustainable solutions that capture a portion of the $1.54 trillion student loan market, while also providing students with post-graduation financial stability. Milliman’s Andrew Groth and Katherine Pipkorn explore some solutions to the student loan crisis in this article.