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."
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