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Cash-Out Refis Dominate Market, Increasing Risk Level

The latest Mortgage Default Index (MMDI) published by Milliman, Inc., showed that mortgage risk rate continues to increase in the second quarter of 2022 with heavy cash-out refinance volumes weighing on the market. 

According to Milliman, the default risk for loans from Fannie Mae and Freddie Mac (the GSEs) acquisitions increased at a rate of 2.28% for mortgage loans originating in the first quarter to 2.78% for loans originating in the second quarter of 2022. 

This means that for mortgage loans originating in the second quarter, the expectation is that 2.78% will become delinquents by at least 180 days over their lifetimes. 

“The volume of refinance mortgages continued to decline in Q2 2022 compared to Q1, likely the result of increasing interest rates,” Milliman wrote. “Mortgage refinance volume has dropped steadily since its all-time high in 2021, when interest rates were at historic lows. Along with the decline in volume, the makeup of refinance loans has changed compared to the year prior. Cash-out refinance loan volume increased from 34% of all refinance originations in 2021, to 74% in Q2 2022.” 

"Cash-out refinance loans historically have higher default rates compared to rate-and-term refinancing," says Jonathan Glowacki, a Principal at Milliman and author of the MMDI. "In 2022, there's been an increase in cash-out refinance originations compared to the prior year, which is a contributing factor in the increased mortgage default risk we're seeing." 

Click here to see the report in its entirety. 

About Author: Kyle G. Horst

Kyle G. Horst is a reporter for DS News and MReport. A graduate of the University of Texas at Tyler, he has worked for a number of daily, weekly, and monthly publications in South Dakota and Texas. With more than 10 years of experience in community journalism, he has won a number of state, national, and international awards for his writing and photography including best newspaper design by the Associated Press Managing Editors Group and the international iPhone photographer of the year by the iPhone Photography Awards. He most recently worked as editor of Community Impact Newspaper covering a number of Dallas-Ft. Worth communities on a hyperlocal level. Contact Kyle G. at [email protected]
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