Spur in refinances lowered credit risk for underlying mortgages, expert says
The probability that the average Fannie Mae and Freddie Mac-backed mortgage would become 180 days delinquent or worse became less likely in the second quarter.
The result of the Milliman Mortgage Default Index (MMDI) showed that the default rate for these loans fell to an estimated average of 1.99%, down from 2.01% in the first quarter.
For comparison, an equivalent Freddie Mac study showed that the actual-to-date default rate of GSE mortgages originated in 2007 was 13.8% shortly before the financial crisis.
"Low-interest rates in Q2 spurred more borrowers to refinance, which typically reduces credit risk for underlying mortgages," said Jonathan Glowacki, principal and consulting actuary at Milliman and co-author of the MMDI. "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."
The index provides a monthly estimate of the lifetime default risk of US-backed mortgages. Several factors, such as the risk of a borrower taking on too much debt, underwriting risk on certain mortgage features, and economic risk like a recession, all put pressure on home prices and affect default risk.
The MMDI rate for Ginnie Mae loans, on the other hand, rose from 8.09% in Q1 to 8.15% in Q2. The increase has been consistent, as default risk for Ginnie Mae acquisitions has been climbing since 2014, according to Milliman.
