Tag Archives: mortgage loans

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.

For more information, click here.

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.

Increased economic risk from COVID-19 puts pressure on mortgage performance in Q1 2020, but losses not expected to rise to global financial crisis level

Milliman today announced the first quarter (Q1) 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. Default risk is driven by various factors, including the risk of a borrower taking on too much debt, underwriting risk (such as loan term, loan purpose, and other influential mortgage features), and economic risk as measured by historical and forecast home prices. The goal of the MMDI is to provide a benchmark to understand trends in U.S. mortgage credit risk.

During Q1 2020, the economic component of default risk for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) climbed 20 basis points—a 40% increase—as a result of housing pressure from COVID-19. For Ginnie Mae loans, which have a higher level of borrower risk relative to GSEs, economic risk jumped 80 basis points—an increase of 33%.

Despite the increased economic risk in Q1, the MMDI for GSE loans decreased to an estimated average default rate of 2.02%, down from 2.06% in Q4 2019. This means that the average lifetime probability of default for all Freddie or Fannie mortgages originated in Q1 2020 was 2.02%. The lower quarterly default risk in the face of economic pressure is because, as interest rates continued to decline, less risky refinance loans offset an increase in default risk for purchase loans. For Ginnie Mae acquisitions, however, the MMDI rate increased from 10.29% in Q4 2019 to 10.48% in Q1 2020. Beginning in 2014, Ginnie Mae has experienced a credit score drift relative to GSE and increased economic risk from COVID-19.

While we anticipate that the large number of unemployment claims will translate to an increase in mortgage delinquency rates, default rates (i.e., the number of borrowers who lose their homes) will likely not be as severe as during the global financial crisis, thanks to the robust home price growth we saw over the past several years.

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.

For more information on the MMDI, click here.

Critical Point examines COVID-19 and the mortgage credit risk market

In this episode of Critical Point, Milliman consultants Chris Harner and Michael Schmitz discuss mortgage credit risk and market trends in light of the COVID-19 pandemic. This episode is the first in a two-part series on credit risk. The next episode will look at the potential that cyberattacks may increase within the financial sector as a result of the pandemic.

To listen to other episodes of Critical Point, click here.

Default risk remained low through Q4 2019, but economic volatility from COVID-19 will put pressure on mortgage performance

Milliman today announced the fourth quarter (Q4) 2019 results of the Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages. Default risk is driven by various factors, including the risk of a borrower taking on too much debt, underwriting risk (such as loan term, loan purpose, and other influential mortgage features), and economic risk as measured by historical and forecast home prices. The goal of the MMDI is to provide a benchmark to understand trends in U.S. mortgage credit risk.

During Q4 2019, the MMDI for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) decreased to an estimated average default rate of 1.82%, down from 1.88% in Q3. This means that the average lifetime probability of default for all Freddie or Fannie mortgages originated in Q4 2019 was 1.82%. For Ginnie Mae loans, the MMDI rate increased from 8.26% in Q3 to 8.75% in Q4. While default risk remained low in Q4 2019 thanks to the low interest rate environment, economic uncertainty from the COVID-19 pandemic has put pressure on mortgage performance.

Given the number of Americans who have filed for unemployment benefits as a result of the COVID-19 pandemic, we anticipate a likely increase in mortgage delinquency rates in the first half of 2020. And while the economic and housing market slowdown resulting from the pandemic could impact long-term mortgage performance, the robust home price growth from the past several years may help ease the default risk somewhat.

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.

For more information on the MMDI, click here.

Obtaining mortgage loan information with artificial intelligence

Applying for a mortgage loan is a process that requires a lot of information to make an informed decision. Even in this digital age the process of obtaining a mortgage remains complex. Can artificial intelligence (AI) technology that makes recommendations based on research from consumer organizations and federal agencies help? Milliman consultant Madeline Johnson looks at the question in her article “Couch surfing for mortgage loans.”