More consumer debt plus economy issues push up mortgage default risk
Increased consumer debt and the threat of an economic downturn increase the default risk for government-sponsored enterprise mortgages during the first quarter, according to a newly created index from Milliman.
The inaugural Milliman Mortgage Default Index rose to 4.16% in the first quarter from 3.38% the year prior and 3.98% a quarter earlier. The index will gauge and identify trends in GSE and government-guaranteed mortgages by looking ahead, according to Milliman.
The GSE-backed mortgage default rate rose to 2.19% in the first quarter from 1.83% year-over-year. By comparison, the GSE default rate reached a high of 13.8% in 2007. Loans backed by Ginnie Mae also increased in the first quarter, going to 8.77% from 7.09% annually.
The Seattle-based actuarial and consulting firm created the index to "produce a forward-looking model of credit risk that tries to get underneath what's moving in the market," Jonathan Glowacki, principal and consulting actuary at Milliman and author of the index, said in a call. The predictive model breaks risk into three components: borrower risk, underwriting risk and economic risk.
The borrowers get measured by various factors like loan-to-value ratio, FICO score and debt-to-income ratio. Underwriting adjustments tell if there will be additional risk as a result of the product features of the mortgage. The economic base measures the housing market risk derived from historical and recent value appreciation to forecast home prices at a metro area-level.
"Default risk is driven by various factors including the risk of a borrower taking on too much debt, underwriting risk such as certain mortgage features, and economic risk such as a recession, which can put pressure on home prices," Glowacki said in a press release. "In the first quarter of 2019, we've seen default risk creep up for both GSE and Ginnie loans as a result of an increase in borrower debt-to-income ratios, credit score drift, and the anticipated increased risk of an economic downturn."
The MMDI rate benchmarks the probability that single-family mortgages in a given portfolio will become 180 days delinquent or worse over the lifetime of the loan, with historical data dating back to 2014.