DSNews The homepage of the servicing industry
According to consulting and actuarial firm Milliman Inc., during Q4 of 2020, mortgage demand continued to rise, with Freddie Mac and Fannie Mae mortgage volume increasing more than 132% year-over-year, hitting record volume in the quarter.
Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages, remained nearly flat for GSE loans, inching down from 1.28% in Q3 to 1.27% in Q4, as interest rates remained low and home prices improved. The MMDI rate for Ginnie Mae loans increased slightly, from 7.39% in Q3 to 7.64% in Q4.
During Q4 2020, mortgage demand remained strong, with volume for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) increasing more than 132% year-over-year. When comparing the most recent GSE acquisitions to the prior quarter, default risk was generally consistent with 2020 Q3 originations. For 2020 Q4, 71% of the mortgage volume was attributable to refinance loans, compared to 68% in 2020 Q3. Loans guaranteed by Ginnie Mae experienced a slight increase in their default risk in 2020 Q4, relative to Q3. Of the Ginnie Mae loans originated during this quarter, approximately 56% were refinance loans.
In terms of default risk, MMDI authors Jonathan B. Glowacki, Principal and Consulting Actuary for Milliman, and Judith-Anne Brelih, Associate Actuary for Milliman, found risk was generally consistent with 2020 Q3 originations, and as for 2020 Q4, 71% of the mortgage volume of the GSEs was attributed to refis, compared to 68% in 2020 Q3. Loans guaranteed by Ginnie Mae experienced a slight increase in their default risk in 2020 Q4 relative to Q3. Of the Ginnie Mae loans originated during this quarter, approximately 56% were refinance loans.
Milliman found that one area of potentially increased levels of risk in the mortgage market has been an increase is cash-out refis over the past year, as in the second half of 2020, cash-out refinance volume increased to over $20 billion per month. Cash-out refi volume, which is typically seen as riskier loan products relative to rate/term refi mortgages, rose significantly for the quarter, averaging approximately $5 billion per month from 2014 through 2019, and approximately $2.5 billion per month for Ginnie Mae.
"Leading up to the global financial crisis, cash-out refinance mortgage loans were a significant driver of risk, as many borrowers extracted equity from growing home prices," said Glowacki. "While cash-out refinance volume has increased significantly in 2020 and 2021, we believe the risk is now somewhat mitigated by tighter underwriting standards, namely capped LTV ratios."
