According to consulting and actuarial firm Milliman Inc., during Q4 of 2020, mortgage demand continued to rise, with Freddie Mac and Fannie Mae mortgage volume increasing more than 132% year-over-year, hitting record volume in the quarter.
Milliman Mortgage Default Index (MMDI), which shows the latest monthly estimate of the lifetime default risk of U.S.-backed mortgages, remained nearly flat for GSE loans, inching down from 1.28% in Q3 to 1.27% in Q4, as interest rates remained low and home prices improved. The MMDI rate for Ginnie Mae loans increased slightly, from 7.39% in Q3 to 7.64% in Q4.
During Q4 2020, mortgage demand remained strong, with volume for government-sponsored enterprise (GSE) acquisitions (purchased and refinanced loans backed by Freddie Mac and Fannie Mae) increasing more than 132% year-over-year. When comparing the most recent GSE acquisitions to the prior quarter, default risk was generally consistent with 2020 Q3 originations. For 2020 Q4, 71% of the mortgage volume was attributable to refinance loans, compared to 68% in 2020 Q3. Loans guaranteed by Ginnie Mae experienced a slight increase in their default risk in 2020 Q4, relative to Q3. Of the Ginnie Mae loans originated during this quarter, approximately 56% were refinance loans.
In terms of default risk, MMDI authors Jonathan B. Glowacki, Principal and Consulting Actuary for Milliman, and Judith-Anne Brelih, Associate Actuary for Milliman, found risk was generally consistent with 2020 Q3 originations, and as for 2020 Q4, 71% of the mortgage volume of the GSEs was attributed to refis, compared to 68% in 2020 Q3. Loans guaranteed by Ginnie Mae experienced a slight increase in their default risk in 2020 Q4 relative to Q3. Of the Ginnie Mae loans originated during this quarter, approximately 56% were refinance loans.
Milliman found that one area of potentially increased levels of risk in the mortgage market has been an increase is cash-out refis over the past year, as in the second half of 2020, cash-out refinance volume increased to over $20 billion per month. Cash-out refi volume, which is typically seen as riskier loan products relative to rate/term refi mortgages, rose significantly for the quarter, averaging approximately $5 billion per month from 2014 through 2019, and approximately $2.5 billion per month for Ginnie Mae.
"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," said Glowacki. "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."