Milliman index signals minor increase in default risk amid housing market shifts
The anticipated dip in home prices caused a slight increase in mortgage default risk for the third quarter of 2023.
Default risk for US-backed mortgages climbed to 3.10% for loans acquired in Q3, up from 3.03% in the previous quarter, according to the latest Milliman Mortgage Default Index (MMDI) results.
This increment in default risk is primarily attributed to a predicted slowdown in home price appreciation. Despite the rise in default risk, Jonathan Glowacki, a principal at Milliman and co-author of the MMDI, said the quality of new mortgage loans remains robust.
“Purchase volume has been decreasing year-over-year, but the quality of loans from a risk perspective has continued to be strong, keeping the default risk of new loan originations low,” Glowacki said in the report.
The MMDI report provides a detailed analysis of default risk components. It highlights an increase in economic risk for government-sponsored enterprise (GSE) loans, which rose from 1.54% in the second quarter of 2023 to 1.64% in the third quarter. Meanwhile, borrower risk saw a slight decrease, dropping from 1.51% to 1.48% over the same period.
Purchase loans dominated the origination mix, accounting for about 89% of total volume. Meanwhile, about 70% of refinancing activities in Q3 were cash-out refinances.
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