Risk of government-backed home loan defaults remain steady
Mortgage originations slumped in the first quarter to their lowest level since 2019, despite stable default risk.
Home loan originations hit a four-year low in Q1 2023, with refinance originations plummeting to their lowest levels in nine years, according to data from the latest Milliman Mortgage Default Index (MMDI). This marks the fifth consecutive quarter that loan originations have decreased and represents a 73% decrease in mortgage origination volume year-over-year.
The index value of the MMDI was 3.44% for loans acquired in the first quarter, which was slightly down from 3.53% in the previous quarter.
Mortgage default risk has remained generally consistent for Freddie and Fannie acquisitions, down from 3.53% to 3.44% quarter over quarter. This brings the share of loans likely to be delinquent (180 days or more) to 3.44%.
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Looking at borrower risk, GSE-backed loans remained relatively unchanged at 1.58%, with purchase loans making up about 87% of total originations compared to 83% last quarter. Underwriting risk stayed low and was negative for purchase mortgages, though the rising interest-rate environment affected refinance originations.
“With interest rates increasing, only 30% of refinance loans were rate/term refinance for the most recent quarter. This compares to 40% in the year prior,” said Jonathan Glowacki, a principal at Milliman and co-author of the MMDI. “Because cash loans are assigned a greater default risk, they continue to drive up overall risk for refinance originations in Q1.”
There was also a slight drop in economic risk, down to 1.87% in the first quarter.
“We notice that economic risk has remained steady for older originations, while economic risk for newer originations has sharply increased as we anticipate slower to negative home price growth in the future,” Milliman wrote in its report.
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