![]() The Milliman Mortgage Default Index (MMDI) uses econometric modeling to develop a dynamic model that is used by clients in multiple ways, including analyzing, monitoring, and ranking the credit quality of new production, allocating servicing sources, and developing underwriting guidelines and pricing. We have used our expertise to assist multiple clients in developing econometric models for evaluating mortgage risk both at the point of sale and for seasoned mortgages. Milliman is expert in analyzing complex data and building econometric models that are transparent, intuitive, and informative. For more detail on the MMDI components of risk, visit /MMDI.Ībout the Milliman Mortgage Default Index To the extent actual or baseline forecasts diverge from the current forecast, future publications of the MMDI will change accordingly. The MMDI reflects a baseline forecast of future home prices. This publication of the MMDI uses the most recent data available to provide timely information on credit trends. For more information on the housing market, please refer to our recent Milliman Insight article, “The housing market is slowing down.what does that mean?” available at. We notice from the chart that economic risk has remained steady for older originations, while economic risk for newer originations has sharply increased as we anticipate slower to negative home price growth in the future. For more recent cohorts, we anticipate negative home price growth, which contributes to increases in economic risk for recent origination years.įigure 2 shows the economic risk component of the MMDI for GSE mortgages as of 2022 Q Q1.įigure 2: Economic risk by investor and origination This results in reduced default risk for older cohorts. Actual home price appreciation was robust from 2014 through 2021, which has resulted in embedded appreciation for older originations. For GSE loans, economic risk decreased from 1.93% in 2022 Q4 to 1.87% in 2023 Q1. Overall, there was a slight decrease in economic risk from 2022 Q4. Economic risk results: 2023 Q1Įconomic risk is measured by looking at historical and forecasted home prices. Cash-out refinance loans are assigned a greater default risk and are contributing to increases in underwriting risk for refinance loans. This is because recent increases in interest rates have made rate/term refinance non-economic. In the most recent quarter, approximately 70% of refinance originations are cash-out refinance loans. Historically, the majority of refinance activity is for rate/term refinance mortgages. For refinance loans, the data is segmented into cash-out refinance loans and rate/term refinance loans. Underwriting risk remains low and is negative for purchase mortgages, which are generally full-documentation, fully amortizing loans. Underwriting risk represents additional risk adjustments for property and loan characteristics such as occupancy status, amortization type, documentation types, loan term, and others. Borrower risk results: 2023 Q1įor government-sponsored enterprise (GSE) loans, borrower risk was consistent from 1.57% in 2022 Q4 to 1.58% in 2023 Q1 with purchase loans making up about 87% of total originations compared to 83% last quarter. Economic risk measures the risk of the loan defaulting due to historical and forecasted economic conditions. Underwriting risk measures the risk of the loan defaulting due to mortgage product features such as amortization type, occupancy status, and other factors. Borrower risk measures the risk of the loan defaulting due to borrower credit quality, initial equity position, and debt-to-income ratio. There are three components of the MMDI: measures for borrower risk, underwriting risk, and economic risk. Over 2023 Q1, our latest MMDI results show that mortgage risk has remained generally consistent for Freddie and Fannie acquisitions. Figure 1: MMDI 2023 Q1 dashboard for GSE loans
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