The risk for serious delinquency on conforming mortgages increased between the second and third quarters primarily due to a projected slower pace of home price appreciation (and even in some markets depreciation) going forward, an analysis by Milliman found.
The Milliman Mortgage Default Index is an estimate of the lifetime serious delinquency rate, which it defines as loans for which the borrower is 180 or more days late on their payments.
The third quarter MMDI is 2.12%, up from a restated 2.03% in the second quarter and a revised 2.62% one year prior. It is also lower than the
This index has three risk components: borrower, underwriting and economic. It is the latter that moved the needle on a quarter-to-quarter basis when looking at loans sold to the government-sponsored enterprises.
The economic risk portion increased to 0.67% from 0.57% for Fannie Mae and Freddie Mac mortgages. When Ginnie Mae mortgages are included, economic risk for the third quarter rose to 1.5% from 1.25% three months prior.
Milliman looks at historic and forecast home prices to measure economic risk.
"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," Milliman's online post about the index noted.
A separate report from Corelogic on its Home Price Index Forecast is bearish on the near-term, expecting prices to decrease by 0.2% between November and December (following a scant 0.06% rise from October). But it expects better annual appreciation, with prices rising 3.8% between this November and next year versus a 3.4% rise in the 12 months starting November 2023.
"Heading into the end of the year, home prices remained relatively flat though showing some marginal improvement from the
"Nevertheless, the cooling home price growth trend is expected to continue well into 2025 partly due to the base effect and comparison with strong early 2023 appreciation and partly because of the expectations of higher mortgage rates over the course of 2025."
Hepp agreed that regional variations in appreciation will persist, with some affordable areas, like smaller metros in the Midwest, remaining in high demand and will continue to experience upward home price pressure.
Corelogic's third quarter mortgage delinquency report also found the
As for the other two forms of risk in the Milliman analysis, for conforming loans, the largest share goes to borrower risk but that declined to 1.46% from 1.47% in the second quarter because of the predominance of purchase loans at 82% of the volume during the period.
"From a risk perspective, with the average loan-to-value ratio being below 80 and average FICO scores above 700, the quality of purchase loans continues to be strong," the Milliman post noted.
When Ginnie Mae loans are included, the borrower risk index was 3.32% for the third quarter, compared with 3.11% for the second quarter.
For the quarter, the MMDI for purchases was 2.09%, while for refinance mortgages, it was 2.12%.
Underwriting risk for conforming mortgages was very small, with the index for purchase mortgages being negative, given that those are primarily full documentation and fully amortizing, Milliman said.
During the third quarter, a brief drop in mortgage rates led to
"For the first time in nearly three years, default risk on refinance loans is equal to or less than the default risk for purchase loans," said Jonathan Glowacki, a principal at Milliman and co-author of the MMDI, in its press release. "With the volume of relatively lower-risk rate/term refinance and higher-risk cash-out refinance loans equaling each other, the default risk for these loans ended up averaging out to a similar default risk rate as purchase loan originations."
Average underwriting risk including Ginnie Mae loans was 0.23% in the third quarter, versus 0.16% for the second quarter.
