Real-Estate

Cash-out refi growth raises mortgage risk but not like housing crisis

Growing cash-out refinance volume fed gains in fourth-quarter default risk for Ginnie Mae-securitized mortgages, according to a Milliman report.

The Milliman Mortgage Default Index — a benchmark measuring delinquency probability over the lifetime of a loan through a combination of borrower, economic and underwriting risks — rose to 7.64% in the fourth quarter of 2020 from 7.39% in the third while declining from 7.7% year-over-year for loans in the Ginnie Mae market. In comparison, the index for mortgages backed by Fannie Mae and Freddie Mac held quarterly at 1.28% and fell annually from 1.5%. These index splits mirror the relative forbearance rates of Ginnie and government-sponsored enterprise-backed loans.

As interest rates plummeted through the year, both the Ginnie and GSE markets saw the refinancing shares of their overall loan volume increase quarterly and annually. Refinances are less risky because they have relatively lower average loan-to-value ratios and credit scores. However, Ginnie Mae loans — which consist of Federal Housing Administration, Department of Veterans Affairs and U.S. Department of Agriculture Rural Housing Service products — typically have lower credit scores and higher LTVs by comparison.

Cash-out refinances — a riskier product than regular refis because they have higher LTVs — grew quarterly for both groups while dropping annually. Cash-out refis made up 6.62% of the Ginnie market’s overall volume in the fourth quarter compared to 5.61% in the third and 12.74% in the fourth quarter of 2019. The relative change in cash-out refi share followed a similar pattern for the GSEs, but appears to have had less impact on borrower’s credit performance. Cash-out-refis in the GSE market stepped up to 17.6% from 16.08% and falling from 21.52 year-over-year.

“Leading up to the global financial crisis, cash-out refinance mortgage loans were a significant driver of risk as many borrowers extracted equity from growing home prices,” Milliman principal Jonathan Glowacki, said in the report. “While cash-out refinance volume has increased significantly in 2020 and 2021, we believe the risk is now somewhat mitigated by tighter underwriting standards, namely capped LTV ratios.”

Borrower risk — a mix of credit quality, initial equity position and debt-to-income ratio — makes up the majority of MMDI. It crept up quarterly for loans in the Ginnie Mae market to 5.87% from 5.82% while dropping from 6.44% in the fourth quarter of 2019. GSE borrower risk descended to 1.03% from 1.07% quarter-over-quarter and 1.33% year-over-year.

The economic risk segment — a measure of historical and forecasted economic conditions — jumped to 1.25% for Ginnie loans from 1.11% in 3Q 2020 and 0.66% in 4Q 2019. It went up to 0.19% from 0.17% and 0.11%, respectively, for the GSEs. Underwriting risk — based on amortization type, occupancy status, and other factors — went to 0.52% for Ginnie Mae in 4Q from 0.46% quarterly and 0.6% annually. The GSE underwriting risk stayed microscopic, going to 0.06% from 0.04% the previous quarter and 0.06% during the same period a year earlier.


Most Related Links :
Business News Governmental News Finance News

Need Your Help Today. Your $1 can change life.

[charitable_donation_form campaign_id=57167]

Source link

Back to top button