Milliman: GSE credit risk not at global crisis level

Home equity and mortgage credit risk matter in so many ways. During the COVID-19 crisis, strong home equity and competitive prices continue to underline the strength of the housing market.

Milliman, Inc., a global consulting and actuarial firm established in 1947, says its default risk forecast models rely on home prices, not on unemployment rates or adjustments for legislative actions or programs such as the CARES Act.

The Milliman Mortgage Default Index (MMDI), estimates the lifetime default risk of single-family home mortgages backed by the Government Sponsored Enterprises (GSEs), and provides “a benchmark to understand trends in U.S. mortgage credit risk.”

During Q1 2020, the economic component of default risk for GSE acquisitions – which includes purchased and refinanced loans backed by Freddie Mac and Fannie Mae – climbed 20 basis points, marking a 40% increase “as a result of COVID-19.”

For Ginnie Mae loans, which have a higher level of borrower risk compared to GSEs loans, the report found, economic risk jumped 80 basis points, an increase of 33%.

The report highlights that Milliman’s MMDI analysis uses historical and forecast home prices to measure economic risk. Default risk factors include borrower debt, underwriting risk such as loan term, and key product metrics.

While we anticipate that the large number of unemployment claims will translate to an increase in mortgage delinquency rates, default rates,” said Jonathan Glowacki, co-author of the MMDI. “The number of borrowers that lose their homes will likely not be as severe as during the global financial crisis thanks to the robust home price growth we saw over the past several years.”

Despite the increased economic risk in Q1, the MMDI for GSE loans decreased to an estimated average default rate of 2.02%, down from 2.06% in Q4 2019, suggesting “the average lifetime probability of default” for all Freddie or Fannie mortgages originated in Q1 was 2.02%.

The lower quarterly default risk despite of economic pressure “is because, as interest rates continued to decline, less risky refinance loans offset an increase in default risk for purchase loans,” explained Glowacki.

For Ginnie Mae acquisitions, the MMDI rate increased to 10.48% in Q1, up from 10.29% in Q4 2019, primarily due to “a credit score drift” compared to GSEs since 2014, analysts wrote, and increased economic risk from COVID-19.

Altogether, findings suggest the higher economic risk created by COVID-19 likely will cause defaults and related losses that are “not expected to rise to global financial crisis level,” the report concludes.

ATTOM: All-time low foreclosures in H1 2020

It has been a long period of decline in delinquencies and foreclosure rates across the nation. Now the low default rates, despite and because of the pandemic, reflect the temporary pause mandated by forbearance relief measures among other factors.

Economists routinely note that without historical precedent for the COVID-19 impact, it is unclear how public and private sector countermeasures will help avoid the potential widespread of foreclosures and delinquencies. A handful warn there will be waves of delinquencies during 2020 and into 2021.

Presently however, according to ATTOM Data Solutions parent company to foreclosure listings portal RealtyTrac, the housing market continues to outperform itself.

During the first half of 2020 (H1 2020), 165,530 U.S. properties had started a foreclosure filing – default notice, scheduled auction, bank repossession – down 44% from the same time-period in 2019, and 54% less than in 2018.

ATTOM’s Midyear 2020 U.S. Foreclosure Market Report shows “the residential foreclosure market across the nation continues to contract amid a combination of booming housing market conditions before the current Coronavirus pandemic hit and a moratorium on activity while the country struggles to overcome the crisis,” said Ohan Antebian, general manager of RealtyTrac.

Nationwide, data from 155 million U.S. properties with at least one foreclosure filing show 0.12% of all housing units, or one in every 824 homes, had a foreclosure filing in H1 2020. Foreclosure rates were highest in Delaware at 0.28%, New Jersey 0.25%, and Illinois 0.24%, Maryland 0.21%, and Connecticut 0.18%.

Foreclosure starts fell nationwide, except in Tennessee, Idaho, and Indiana.

The number of U.S. properties that started the foreclosure process in the first six months of 2020 was 99,028, down 44% from a year ago “to the lowest six-month total going back to the second half of 2005,” the report’s earliest data available.

In 2019, foreclosure starts and completions were already declining rapidly “because the housing market and the economy were riding so high,” explained Antebian. “Now they’re down to lows not seen for at least 15 years as the federal government has banned lenders from pursuing most delinquent loans until at least the end of August 2020 to help people weather the pandemic.” 

The total number of bank foreclosed and repossessed properties, or real estate owned (REO) homes was 37,917 in H1 2020, dropping 44% from a year ago to the lowest six-month total since the company began tracking in 2005. Probably with some help from tight inventory and pent up demand.

States with the largest year-over-year REO decline led by Mississippi, down 76%, South Dakota 65%, and 64% in Kansas and Idaho. Nebraska was the only state where REOs increased, at 76%.

Once the moratorium is lifted, Antebian argued, distressed property volume “is almost guaranteed to increase significantly” because millions of Americans missed their mortgage payments in June and will continue to because of unemployment.

Radian: Q2 new primary defaults up

The pandemic has complicated mortgage delinquency reporting. One of the homeowner benefits from the Coronavirus Aid, Relief & Economic Security (CARES) Act is that lenders are required and do not report to the credit agencies any defaults related to forbearance mortgages. Unlike lenders, servicers have an obligation to insurers to continue to report missed payments, keeping it real at all times.

Fittingly, loan performance data reported by mortgage insurance fintech, Radian Guaranty Inc., a subsidiary of Radian Group, include all new primary loan defaults. It includes a total of defaults under forbearance programs due to COVID-19, as well as cures, claims paid and rescissions or denials.

For the second quarter of 2020, Radian reported total new primary loan defaults for the months of April, May and June increased progressively from 19,781 at the beginning of April, up to 69,742 at the end of June.

The significant increase reflects the economic effect of COVID-19 on mortgage borrowers, the report notes. Defaults increased 141%, to 55,103 at the end of May, up from 22,790 at the end of April.

Radian uses information about new defaults and cures as reported by loan servicers who, for financial statement tracking purposes, consider a loan in default when they receive notification that a borrower has missed two monthly payments.

The number of primary loans in default increased by 6,228 in April, followed by a more than five times increase that added 35,915 new defaults in May and 20,862 new defaults in June.

Cures, claims paid/denied, and recessions totaled 3,219 in April, 3,602 in May and 6,229 in June, reducing the default inventory by 13,050 loans during Q2 2020. Nonetheless, by the end of June, an additional 49,961 primary loans were in default.

The monthly data are affected by the date loan servicers sent the information to Radian and the timing of servicing transfers, the fintech said.

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