Overall mortgage default risk defied expectations in Q2

Record refinance volume seen during COVID-19 resulted in the improvement in defaults

Overall mortgage default risk defied expectations in Q2

Default risk for government-backed mortgages did better than industry experts expected in the second quarter of 2020, according to the results of the Milliman Mortgage Default Index (MMDI).

Despite the challenges caused by the coronavirus crisis, default risk for purchase and refinance loans backed by Freddie Mac and Fannie Mae decreased for the first time since at least Q3 2019.

"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," said Jonathan Glowacki, co-author of the MMDI. "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."

Refinance loans, which are considered lower risk relative to purchase loans, accounted for approximately 70% of mortgage volume in Q2. Coupled with a strong demand for housing, the refinance boom pulled overall default risk for government-sponsored enterprise loans down from 1.99% to 1.74% quarter over quarter.

Meanwhile, the MMDI rate for Ginnie Mae acquisitions grew from 10.33% in Q1 to 10.6%1 in Q2, driven mainly by increased refi 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.