There's a new way to measure defaults for government-backed loans

by Steve Randall06 Aug 2019

A new quarterly index will help lenders understand current risks in government-backed mortgages.

The Milliman Mortgage Default Index shows the latest monthly estimate of the lifetime default risk of US-backed mortgages and has been launched this week.

"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," says Jonathan Glowacki, principal and consulting actuary at Milliman and author of the MMDI.

The default rate estimate is calculated at the loan level for a portfolio of single-family mortgages delivered to Freddie Mac, Fannie Mae, and Ginnie Mae.

The index determines 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.

Current risk is higher than a year ago

The new index shows that the risk at the end of March 2019 increased to an estimated average default rate of 2.19%, up from 1.83% a year earlier for loans backed by Fannie Mae and Freddie Mac. For Ginnie Mae loans, the Q1 2019 MMDI rate stands at 8.77%, up from 7.09% a year earlier.

"In the first quarter of 2019, we've seen default risk creep up for both GSE and Ginnie 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," added Glowacki.


More market update: