The estimated lifetime default risk of state-guaranteed home loans remained unchanged in the fourth quarter of 2020, the Milliman Mortgage Default Index (MMDI) results revealed.
As interest rates fell to historically low levels, the mortgage default risk rate for GSE loans fell from 1.28% in Q3 to 1.27% in Q4. Meanwhile, the MMDI rate on Ginnie Mae loans fell from 7.39% to 7.64% quarter over quarter.
Supported by strong borrower demand and low interest rates, the volume of publicly guaranteed mortgages has climbed more than 132% year over year. Refinancing loans represented about 71% of GSE’s mortgage volume for the quarter, while about 56% of Ginnie Mae’s loans were created in the fourth quarter through refinancing.
The volume of refinancing receipts, which is generally considered a riskier loan product compared to rate / term refinance mortgages, has increased significantly. GSE’s cash-out refinance mortgages averaged about $ 5 billion per month from 2014 to 2019 and about $ 2.5 billion per month for Ginnie Mae. For the second half of 2020, the volume of refinancing receipts reached more than 20 billion dollars per month.
“Before the global financial crisis, rollout refinance mortgages were a significant risk factor as many borrowers drew equity from rising house prices,” said Jonathan Glowacki, director at Milliman and author of MMDI . “As the volume of refinancing receipts increased significantly in 2020 and 2021, we believe the risk is now somewhat mitigated by stricter underwriting standards, namely capped LTV ratios.”