The Milliman Mortgage Default Index (MMDI) is a lifetime default rate estimate calculated at the loan level for a portfolio of single-family mortgages. For the purposes of this index, default is defined as a loan that is expected to become 180 days or more delinquent over the life of the loan.1 The results of the MMDI reflect the most recent data acquisition available from Freddie Mac and Fannie Mae, with measurement dates starting from January 1, 2014.
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Click here to explore the MMDI data on a more granular level, including loan origination and type.
Key findings
The second quarter (Q2) of 2023 has seen continued low mortgage volume as interest rates climbed to approximately 7% during the quarter. Mortgage originations for both refinance and purchase mortgage originations are in line with 2019, similar to volume we saw pre-pandemic.
The index value of the MMDI is 3.02% for loans acquired in 2023 Q2, down slightly from the 2023 Q1 index value of 3.12%. Figure 1 provides the quarter-end index results, segmented by purchase and refinance loans.
Figure 1: MMDI 2023 Q2 dashboard for GSE loans
Summary of trends
Over 2023 Q2, our latest MMDI results show that mortgage risk has decreased for government-sponsored enterprise (GSE) acquisitions. It is interesting that the change in the MMDI differed this quarter for Freddie Mac and Fannie Mae acquisitions. The MMDI for Freddie acquisitions increased from 3.04% to 3.09%, and the MMDI for Fannie acquisitions decreased from 3.17% to 2.96%. There are three components of the MMDI: results for borrower risk, underwriting risk, and economic risk. Borrower risk measures the risk of the loan defaulting due to borrower credit quality, initial equity position, and debt-to-income ratio.
Underwriting risk measures the risk of the loan defaulting due to mortgage product features such as amortization type, occupancy status, and other factors. Economic risk measures the risk of the loan defaulting due to historical and forecasted economic conditions.
Borrower risk results: 2023 Q2
Borrower risk decreased from 1.58% in 2023 Q1 to 1.50% in 2023 Q2, with purchase loans continuing to make up the bulk of originations at about 87% of total volume. Fannie had a 0.14% decrease in the MMDI which can be attributed to a decrease in borrower risk, whereas Freddie experienced a 0.01% increase in borrower risk. The overall MMDI decreased because Fannie had a higher level of acquisitions for 2023 Q2, and the bulk of the volume was purchase loans.
Underwriting risk results: 2023 Q2
Underwriting risk represents additional risk adjustments for property and loan characteristics such as occupancy status, amortization type, documentation types, loan term, and other adjustments. Underwriting risk remains low and is negative for purchase mortgages, which are generally full-documentation, fully amortizing loans. For refinance loans, the data is segmented into cash-out refinance loans and rate/term refinance loans.
This quarter, approximately 68% of refinance originations were cash-out refinance loans. Recent increases in interest rates have made rate/term refinance non-economic.
Economic risk results: 2023 Q2
Economic risk is measured by looking at historical and forecasted home prices. For GSE loans, economic risk decreased very slightly quarter over quarter, from 1.54% in 2023 Q1 to 1.53% in 2023 Q2.
Figure 2 shows the economic risk component of the MMDI for GSE mortgages as of 2023 Q1 and Q2.
Figure 2: Economic risk by investor and origination
We notice from the chart that economic risk has remained steady for older originations, while economic risk for newer originations has increased as we anticipate slower to negative home price growth in the future. For more information on the housing market, please refer to our recent Milliman Insight article, “Forecasting the housing market: An economic outlook of housing affordability and home prices” available at https://www.milliman.com/en/insight/forecasting-housing-market-economic-outlook-affordability-home-prices. This publication of the MMDI uses the most recent data available to provide timely information on credit trends.
The MMDI reflects a baseline forecast of future home prices. To the extent actual or baseline forecasts diverge from the current forecast, future publications of the MMDI will change accordingly. For more detail on the MMDI components of risk, visit milliman.com/MMDI.
About the Milliman Mortgage Default Index
Milliman is expert in analyzing complex data and building econometric models that are transparent, intuitive, and informative. 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.
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. Because the MMDI produces a lifetime default rate estimate at the loan level, it is used by clients as a benchmarking tool in origination and servicing. The MMDI is constructed by combining three important components of mortgage risk: borrower credit quality, underwriting characteristics of the mortgage, and the economic environment presented to the mortgage. The MMDI uses a robust data set of over 30 million mortgage loans, which is updated frequently to ensure it maintains the highest level of accuracy.
Milliman is one of the largest independent consulting firms in the world and has pioneered strategies, tools, and solutions worldwide. We are recognized leaders in the markets we serve. Milliman insight reaches across global boundaries, offering specialized consulting services in mortgage banking, employee benefits, healthcare, life insurance and financial services, and property and casualty (P&C) insurance. Within these sectors, Milliman consultants serve a wide range of current and emerging markets. Clients know they can depend on us as industry experts, trusted advisers, and creative problem-solvers.
Milliman's Mortgage Practice is dedicated to providing strategic, quantitative, and other consulting services to leading organizations in the mortgage banking industry. Past and current clients include many of the nation's largest banks, private mortgage guaranty insurers, financial guaranty insurers, institutional investors, and governmental organizations.
1 For example, if the MMDI is 10%, then we expect 10% of the mortgages originated in that month to become 180 days or more delinquent over their lifetimes.