Mortgage Default Risk Down, Originations at Pre-Pandemic Levels


Milliman Inc., a global consulting and actuarial firm, released the second-quarter 2023 results of its Milliman Mortgage Default Index (MMDI), which shows Milliman’s latest monthly estimate of the lifetime default risk of United States-backed mortgages.

Mortgage default risk declined to 3.02% for loans acquired in the second quarter of 2023, compared to 3.12% for loans acquired during the first quarter of 2023. Interestingly, the default risk for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) did not follow typically observed patterns during the second quarter.

The default risk for Freddie Mac acquisitions increased from 3.04% to 3.09% due to an increase in borrower risk, whereas the default risk for Fannie Mae acquisitions decreased from 3.17% to 2.96% due to a decrease in borrower risk. But because Fannie Mae had a greater volume of acquisitions in the second quarter of 2023 – mostly purchase loans – the default risk for GSEs decreased overall by ten percentage points.

The market saw continued low mortgage volume in the second quarter as interest rates climbed to about 7%, with purchase loans making up 87% of total originations.

“Mortgage originations for both refinance and purchase loans are in line with 2019, similar to volume we saw pre-pandemic,” says Jonathan Glowacki, a principal at Milliman and co-author of the MMDI. “The recent increases in interest rates have made rate/term refinance loans less attractive to homebuyers, and about 68% of refinance originations in the second quarter were cash-out refinance loans.”

The MMDI reflects a baseline forecast of future home prices.

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