Tag Archives: mortgages

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.

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.

Portfolio risk management: Repurchase risk for non-QM mortgages

In the wake of the 2008 global financial crisis, many risk managers were caught flat-footed with representations and warranties exposure, also commonly known as repurchase exposure. After the crisis, the mortgage industry as a whole tightened up its processes and controls around the issuance of mortgage loans. Milliman’s Jonathan Glowacki and Edem Togbey offer perspective in this MBA Newslink article.

The article was also co-authored by Prieston & Associates’ Arthur Prieston and Zach Prieston.

Default risk for government-backed mortgages decreases in Q2 2019 as low interest rates spur borrowers to refinance

Milliman has announced the second quarter (Q2) 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. The goal of the MMDI is to provide a benchmark to understand trends in U.S. mortgage risk.

As of July 1, 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 1.99%, down from 2.01% in Q1. This means that, for the average Freddie or Fannie mortgage that originated in Q2 2019, there is a 1.99% probability the loan will become 180 days delinquent or worse. To put that in context, equivalent research from Freddie Mac shows the actual to-date default rate of GSE mortgages originated in 2007 (shortly before the financial crisis) was 13.8%.

Low interest rates in Q2 spurred more borrowers to refinance, which typically reduces credit risk for underlying mortgages. But while the default rated dipped slightly in the second quarter of this year, we’re also starting to see increased economic risk from slower home price growth, which may elevate mortgage default risk in the future.

For Ginnie Mae loans, the Q2 2019 MMDI rate increased from 8.09% in Q1 to 8.15% in Q2. This uptick is consistent with the overall trend for these loans, as default risk for Ginnie Mae acquisitions has been rising since 2014. 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.

For more information on the MMDI, click here.

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.

How would a recession affect credit risk transfer exposures?

The United States is experiencing one of the longest economic recoveries in modern times. However, given the unprecedented length of this economic recovery and a few additional indicators, an increasing number of economists and experts anticipate that the end of the long recovery is near.

Though the fundamentals of the U.S. economy remain sound (low unemployment rate, strong GDP growth, etc.), there are a number of events that could contribute to an economic slowdown, including a government shutdown, Brexit, trade tension between the world’s largest economies (United States and China), and the stock market volatility observed in December 2018.

The U.S. economy has experienced many recessions. Some are mild and focused in specific industries or sectors, like the recession of 2001 that was tech-centered, while others are global and widespread, like the global financial crisis of 2007-2010. In this article, Milliman’s Edem Togbey and Jonathan Glowacki review the potential impact of a mild recession on portfolios of investors involved in mortgage credit risk transactions using the firm’s proprietary M-PIRe platform.