Milliman: Mortgage Delinquency Risk Increased in Q3

(Image courtesy of Milliman; Breakout image courtesy of Erik Mclean/pexels.com)

Milliman, Seattle, released its Q3 Milliman Mortgage Default Index for GSE acquisitions, finding that mortgage delinquency risk rose to 2.12% for loans acquired in the third quarter from 2.03% in the second quarter.

The increase was driven primarily by the projected slowing of home price appreciation.

The MMDI shows Milliman’s latest monthly estimate of the lifetime serious delinquency rates of U.S.-backed mortgages.

Milliman noted the Q2 MMDI values were revised since that quarter’s publication, going from 2.13% to 2.03%. This was due to actual home price appreciation exceeding forecasts.

Economic risk largely drove the overall results; for GSE loans, economic risk increased from 0.57% in Q2 to 0.67% in Q3

Borrower risk–the risk of the loan becoming severely delinquent due to borrower credit quality, initial equity position and debt-to-income ratio remained near flat, going from 1.47% to 1.46%.

Less-risky purchase loans continued to make up the bulk of originations, at 82% of volume. The average loan-to-value ratio is below 80 and the average FICO score is above 700, meaning the quality of purchase loans continues to be strong, Milliman noted.

Underwriting risk, or additional risk adjustments for property and loan characteristics such as occupancy status, amortization type, documentation types, loan term and other adjustments, remains low and is negative for purchase mortgages.

But, the volume for rate/term and cashout refinance loans were both about $16 billion.

“For the first time in nearly three years, default risk on refinance loans is equal to or less than the default risk for purchase loans,” said Jonathan Glowacki, a Principal at Milliman and co-author of the MMDI. “With the volume of relatively lower-risk rate/term refinance and higher-risk cash-out refinance loans equaling each other, the default risk for these loans ended up averaging out to a similar default risk rate as purchase loan originations.”