Tag Archives: mortgage insurance

Milliman launches new index to measure the risk of default for government-backed mortgages

Milliman today is launching the first-ever Milliman Mortgage Default Index (MMDI), a quarterly publication that shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages. The goal of the MMDI is to provide a benchmark to understand trends in U.S. mortgage risk.

After the subprime mortgage crisis of 2008, the financial services industry instituted various risk mitigation efforts to help guard against a similar rise in mortgage credit risk and its associated effects on the global economy. As part of this effort, Milliman is launching the MMDI, a lifetime default rate estimate calculated at the loan level for a portfolio of single-family mortgages delivered to Freddie Mac, Fannie Mae, and Ginnie Mae. The MMDI rate is an index benchmarking the probability that mortgages in a given portfolio will become 180 days delinquent or worse over the lifetime of the loan, with historical data dating back to 2014.

As of March 31, 2019, the MMDI for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) increased to an estimated average default rate of 2.19%, up from 1.83% the year prior. For Ginnie Mae loans, the Q1 2019 MMDI rate stands at 8.77%, up from 7.09% the year prior.

For comparison, the actual to-date default rate of GSE mortgages originated in 2007 (shortly before the financial crisis) was 13.8%, according to Freddie Mac data. The actual to-date default rate for Federal Housing Administration (FHA) loans (which are the majority of Ginnie Mae loans) originated in 2007 was approximately 26.5%, according to FHA’s Single Family Loan Performance Trends report as of February 2019. While this data is not directly comparable, these numbers provide an equivalent comparison of the magnitude of defaults during the crisis relative to the current expected mortgage default risk for new originations in 2019.

Default risk is driven by various factors including the risk of a borrower taking on too much debt, underwriting risk such as certain mortgage features, and economic risk such as a recession, which can put pressure on home prices. In the first quarter of 2019, we’ve seen default risk creep up for both GSE and Ginnie Mae loans as a result of an increase in borrower debt-to-income ratios, credit score drift, and the anticipated increased risk of an economic downturn.

For more information on the MMDI and to view detailed, granular data, click here.

Is it time to let private mortgage insurers back in on the housing market?

The U.S. House Financial Services Committee recently met with private mortgage insurance (MI) experts comparing private sector and government-subsidized approaches. This Housing Wire article cites Milliman’s Ken Bjurstrom testimony to the committee.

Here is an excerpt from the article:

Private mortgage insurers are ready to play a role in the housing finance market, but that won’t happen until federal housing agencies strike the appropriate balance between private insurers and the Federal Housing Administration (FHA), industry representatives claim.

Experts met on Wednesday [March 13] and suggested to members of the House Financial Services Committee that private mortgage insurers have the ability to play a significant role in mortgage finance.

…Kenneth Bjurstrom, principal and financial consultant for Milliman, recommended that the FHA evaluate and adopt various private mortgage insurance standards, specifically the MI’s accounting provisions.

Bjurstrom also advised FHA to better understand and modify its risk exposures and “retain the necessary capital that is required to protect the program now and for the next economic downturn that will most definitely occur again,” he said.

Here is Bjurstrom’s testimony concerning mortgage insurance operations:

The key objective of the ratemaking process is the estimation of the costs associated with the transfer of risk effected by issuing mortgage insurance policies. Historically, mortgage insurers have generally used the size of the down payment or loan-to-value, product type such as fixed rate or adjustable rate and the amount of coverage in their underwriting and ratemaking approach. Relatively recently, private mortgage insurers have expanded their premium rate programs to recognize the importance of borrower FICO Scores and other factors.

In contrast, the FHA currently utilizes fewer tools available to them to financially manage mortgage insurance exposures. The FHA insures 100% of the potential claim loss, compared to generally 25% to 35% for private mortgage insurers, and the FHA charges the same premium rates for all loan product types and borrower FICO Scores. Without a more granular approach to ratemaking the FHA may be encouraging adverse selection with respect to obtaining FHA mortgage insurance protection.

Ratemaking for mortgage insurance should take these factors into account and take a long-term view of pricing while also considering the important roles adverse selection and changes in the underlying insured risks. The adverse selection effects of alternatives to mortgage insurance coupled with the potential for future boom and busts in the housing market add to the operational challenges of mortgage insurance industry.

To read Bjurstrom’s entire testimony, click here.