Riskier cash-out refinance loans made up nearly three-quarters of refinance originations in Q2, according to a new analysis by consulting firm Milliman, Inc.

The Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages, found that the default risk for purchased and refinanced loans backed by GSEs Freddie Mac and Fannie Mae increased from a rate of 2.28% for mortgage loans originating in Q1 to 2.78% for loans originating in Q2—meaning that those 2.78% of loans are expected to become delinquent (180 days or more) over their lifetimes.

“Cash-out refinance loans historically have higher default rates compared to rate-and-term refinancing,” says Jonathan Glowacki, principal at Milliman and author of the MMDI. “In 2022, there’s been an increase in cash-out refinance originations compared to the prior year, which is a contributing factor in the increased mortgage default risk we’re seeing.”

The volume of refinance mortgages continued to decline in Q2  compared to Q1, according to the report. Along with the volume decline, the makeup of refinance loans changed compared to the prior year. Cash-out refinance loan volume increased from 34% of all refinance originations in 2021 to 74% in Q2 2022.

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