Potential future GSE loan lates reach high in 3Q

Continued inflation growth and rising interest rates mean that a record high share of conforming mortgages originated in the third quarter are likely to become at least 180 days delinquent, actuarial firm Milliman found.

Expectations are that 3.54% of mortgages originated for sale to Fannie Mae and Freddie Mac in the three months ended Sept. 30 will become six months late on their payments during their lifetime, the Milliman Mortgage Default Index calculated. The share is up from 3.02% for loans produced during the second quarter. For the third quarter of 2021, the MMDI was 1.73%.

That is the highest level for the index going back to 2014, according to data on Milliman's website.

The MMDI looks at future performance. Current loan performance remains strong, with the share of loans more than 90 days late in September falling to 1.2% on a seasonally adjusted basis from 2.4% according to a recent CoreLogic report. Mortgages in arrears by 30 to 59 days inched up to 1.2% from 1.1%, and delinquencies that have been outstanding for 60 to 89 days rose to 0.4% from 0.3%.

However, an Attom Data Solutions study found that 28 out of the 50 U.S. counties most vulnerable to mortgage balances exceeding the property's value, also known as going underwater, were located in New Jersey, Illinois and California. Those are indicators of future pain points.

Meanwhile, 5% of all mortgages originated this year, both purchases and refis, are already underwater, Black Knight found.

The MMDI consists of three components with the largest increase recorded in average economic risk for conforming loans at 1.91% for the third quarter, compared with 1.39% in the second quarter and 0.18% for the third quarter of 2021.

Average borrower risk for conforming loans was 1.61% for the period ended Sept. 30, while for the prior quarter, it was 1.57% and 1.37% one year ago.

However, average underwriting risk was minimal for the third quarter at 0.02%, down from 0.07% on a quarter-to-quarter basis and 0.08% year-over-year.

The increased default hazard is a result of the higher share of purchase mortgages — which inherently have higher borrower risk because of lower credit scores and higher loan-to-value ratios — as volume is falling. While refinance production declined 87% from the second quarter, a larger share were of the cash-out variety, which are more likely to default than rate-and-term originations. During each month of the third quarter and into October, cash-out application rate-lock activity was between 2.5 and 4 times that for rate-and-term loans, Black Knight Optimal Blue data noted. "That, plus increasing economic risk associated with an expected slowdown in home price growth, are contributing to the increased mortgage default risk we're seeing," said Jonathan Glowacki, a principal at Milliman and author of the MMDI, in a press release.

For Ginnie Mae loans, the MMDI was 13.45%, compared with 12.04% in the second quarter and 7.98%.

The overall MMDI was 4.81%, down from 5.35% in the second quarter. Unlike the component indices, this one didn't rise primarily because the Ginnie Mae share of originations fell to $33.9 billion from $115.1 billion.  One year ago, the total MMDI was 3.06%.