Looser underwriting boosts serious default risk in 1Q25

Some loosening in mortgage underwriting contributed to the 8-basis-point quarter-to-quarter increase in the Milliman Mortgage Default Index.

This measurement is an estimate of the lifetime serious delinquency rate, which Milliman defines as loans for which the borrower is 180 or more days late on their payments. It looks at loans acquired by the government-sponsored enterprises during the period; for the first quarter it totaled $131.14 billion.

The first quarter MMDI was 2.13%, compared with a restated 2.05% for the fourth quarter of 2024. The fourth quarter restatement from the originally published 2.12% is due to actual home price appreciation being higher than forecasted during the period.

Why default risk increased

"In early 2025, GSE acquisitions had slightly higher [debt-to-income] and loan-to-value ratios compared to the prior quarter, and a slightly lower average FICO score, meaning borrowers were taking on more debt compared to prior quarters," said Jonathan Glowacki, a principal at Milliman and co-author of the MMDI, in a press release. "While the quality of purchase loans continues to be strong, we'll be monitoring how economic turbulence may impact borrower risk for government-sponsored loans."

Home price rises are continuing to slow. The May S&P Corelogic Case-Shiller Index rose 2.3% year-over-year, the slowest increase in nearly two years. Month-to-month, they increased 0.4% from April on an unadjusted basis, and fell 0.3% seasonally adjusted.

Mortgages acquired had higher ratios in 1Q

The underwriting loosening is seen in an increase in economic risk of 4 basis points to 0.68% and a 3 basis point in the borrower risk component of the MMDI to 1.43%.

Borrower risk is the chance a mortgage could become seriously delinquent due to credit quality, initial equity position and DTI.

For the first quarter, the average LTV was 77.1%, with a 38.5 average DTI and 757 average FICO credit score.

In the fourth quarter, these were 76.7%, 38.2% and 758 respectively.

Cash-out refis have higher default risk than other loans

The third component is underwriting risk, which Milliman notes was negative for loans used for home purchases during the quarter.

But for refinance mortgages, the weighted average underwriting risk of 30 basis points was a 6 basis point increase from the fourth quarter. For the period, less risky rate-and-term refis were $18 billion of the quarter's volume, while cash-out mortgages were $16 billion.

The refinance MMDI was 2.33% in the first quarter, while for purchase mortgages had a 2.07% MMDI.

Fannie Mae and Freddie Mac recorded increased credit loss provisions in their recently released second quarter results.

At Freddie Mac, the $622 million provision was a little less than double for one-year prior as the company dealt with "modeled and observed house price declines, lower forecasted house price appreciation and provision on new originations under CECL recognition as we continue to grow our single-family portfolio," Jim Whitlinger, chief financial officer said on the earnings call.