"Risk is now somewhat mitigated by tighter underwriting standards"
The estimated lifetime default risk of government-backed home loans remained flat in the fourth quarter of 2020, results of the Milliman Mortgage Default Index (MMDI) revealed.
As interest rates fell to record lows, mortgage default risk rate for GSE loans dropped from 1.28% in Q3 to 1.27% in Q4. Meanwhile, the MMDI rate for Ginnie Mae loans edged up from 7.39% to 7.64% quarter over quarter.
Buoyed by solid borrower demand and low rates, mortgage volume for government-backed loans soared by more than 132% year-over-year. Refinance loans made up roughly 71% of GSE mortgage volume for the quarter, while approximately 56% of Ginnie Mae loans originated in Q4 were the result of refinancing.
Cash-out refinance volume, which is typically seen as riskier loan products relative to rate/term refinance mortgages, increased significantly. GSE cash-out refinance mortgages averaged approximately $5 billion per month from 2014 through 2019 and around $2.5 billion per month for Ginnie Mae. For the second half of 2020, cash-out refinance volume was up to over $20 billion per month.
“Leading up to the global financial crisis, cash-out refinance mortgage loans were a significant driver of risk as many borrowers extracted equity from growing home prices,” said Jonathan Glowacki, a principal at Milliman and author of the MMDI. “While cash-out refinance volume has increased significantly in 2020 and 2021, we believe the risk is now somewhat mitigated by tighter underwriting standards, namely capped LTV ratios.”