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 severely delinquent (i.e., 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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Key findings
The value of the MMDI for government-sponsored enterprise (GSE) acquisitions is up slightly to 2.25% for loans acquired in the first quarter (Q1) of 2024, from 2.21% for loans acquired in 2023 Q4. The projected slowing, and slight decrease in some markets, of home price appreciation remains the primary cause of the increase. Figure 1 provides the quarter-end index results, segmented by purchase and refinance loans.
When reviewing quarter-over-quarter changes in the MMDI, it is important to note that the 2023 Q4 MMDI values have been restated since our last publication and were adjusted from 2.71% to 2.21%. The restatement is due to actual home price appreciation exceeding forecasts. Home price appreciation continues to surpass 6% on an annualized basis, and the prior forecasts expected flat to negative home price growth. Recent updates to home price forecasts now forecast home prices to continue to grow at an approximate 3% annual rate.
Figure 1: MMDI 2024 Q1 dashboard for GSE loans
Summary of trends
Over 2024 Q1, our latest MMDI results show that mortgage risk has increased for GSE acquisitions. There are three components of the MMDI: borrower risk, underwriting risk, and economic risk. The change in index value quarter-to-quarter was driven by economic risk. Borrower risk measures the risk of the loan becoming severely delinquent due to borrower credit quality, initial equity position, and debt-to-income ratio.
Underwriting risk measures the risk of the loan becoming severely delinquent due to mortgage product features such as amortization type, occupancy status, and other factors. Economic risk measures the risk of the loan becoming severely delinquent due to historical and forecasted economic conditions.
Borrower risk results: 2024 Q1
Similar to the quarter-over-quarter change from our last publication, borrower risk remains level at 1.48% from 2023 Q4 to 2024 Q1, with purchase loans continuing to make up the bulk of originations at about 85% of total volume. The quality of purchase loans continues to be strong from a risk perspective, with the average loan-to-value ratio below 80 and average FICO scores above 700. This continues to keep the risk of becoming severely delinquent for new originations low.
Underwriting risk results: 2024 Q1
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 61% of refinance originations were cash-out refinance loans. Recent increases in interest rates have made rate/term refinancing unattractive.
Economic risk results: 2024 Q1
Economic risk is measured by looking at historical and forecasted home prices. For GSE loans, economic risk increased quarter over quarter, from 0.74% in 2023 Q4 to 0.77% in 2024 Q1. Home price appreciation has been projected to slow and even slightly decrease in some markets after the boom that occurred over the course of the pandemic.
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.