Mortgage default risk increases as refi boom nears an end

Report author says current market “faintly echoes” that of 2007 – but there are key differences

The lifetime default risk of US-backed mortgages rose in the second quarter of 2021 as less-risky refinance loans continued to dwindle, according to the Milliman Mortgage Default Index (MMDI). The report showed that rising interest rates led to an increase in purchase loans, as refinances – which are typically viewed as lower-risk – decreased over the quarter. According to the Mortgage Bankers Association's latest survey, the refi share of mortgage activity dropped from 63.5% to 62.9%, as the 30-year fixed mortgage rate climbed to 3.1%.

"We've been seeing default risk climb throughout the first half of 2021, driven primarily by increased economic and borrower risk for new purchase loans," said Jonathan Glowacki, a principal at Milliman and author of the MMDI. "And while today's housing market faintly echoes that of 2007, before the global financial crisis, we see a number of important key factors that differentiate this increase in default risk."

Quarter over quarter, the default risk for purchase and refinance mortgages backed by Fannie Mae and Freddie Mac increased from 1.20% to 1.48%. The mortgage default rate for Ginnie Mae loans was up from 7.41% in the first quarter to 8.75% in the second quarter.