Milliman, a global consulting and actuarial firm, released its latest Mortgage Default Index (MMDI) for the first quarter of 2025, revealing a modest increase in lifetime mortgage default risk for government-sponsored enterprise (GSE) loans. The index, which measures the expected rate of loans that will become severely delinquent (180 days or more) over their lifetimes, rose to 2.13% in Q1, up from a revised 2.05% in the fourth quarter of 2024.
Key Drivers Of The Increase
The slight increase in the MMDI is attributed primarily to borrower-related risk factors, including marginally higher loan-to-value (LTV) and debt-to-income (DTI) ratios, and a slight decline in average FICO scores.
“Over 2025 Q1, our latest MMDI results show that mortgage risk has increased slightly for GSE acquisitions,” Milliman reported. The MMDI comprises three components: borrower risk, underwriting risk, and economic risk.
Borrower Risk: Main Contributor
Borrower risk rose from 1.40% in Q4 2024 to 1.43% in Q1 2025, making it the primary driver of the overall increase in default risk. “From a risk perspective, with the average LTV being below 80 and average FICO scores above 700, the quality of purchase loans continues to be strong.” Purchase loans remained dominant, comprising 82% of all GSE loan originations during the quarter.
Underwriting Risk: Minimal But Rising For Refinances
Underwriting risk remains low overall and is negative for purchase loans, which are typically fully amortizing and require full documentation. However, refinance loans — especially cash-out refinances — carry higher underwriting risk.
In Q1 2025, rate/term refinances accounted for $18 billion in volume, while cash-out refinances reached $16 billion, for a total of $34 billion. Milliman noted, “Cashout refinance mortgages have a higher risk relative to purchase loans, and rate/term refinance mortgages have a lower risk relative to purchase loans.” Weighted-average underwriting risk for refinance loans increased from 0.24% in Q4 2024 to 0.30% in Q1 2025.
Economic Risk: Slightly Elevated
Economic risk — driven by home price trends and forecasts — increased from 0.64% to 0.68%. “Home price forecasts remain stable, and appreciation is projected to slow to low single digits nationally over the next year,” the report stated.
For originators, underwriters, and risk managers, Milliman’s findings highlight a shift worth monitoring. While the overall increase in default risk is modest, it reflects a broader trend of gradual erosion in borrower credit quality and slightly riskier loan profiles entering GSE pipelines.
Lenders may consider adjusting risk overlays or revisiting guidelines for high-LTV or high-DTI borrowers. For mortgage brokers and loan officers, this could mean more emphasis on borrower education, especially around credit improvement and debt reduction.
At the same time, the rise in underwriting risk for cash-out refinances signals a need for heightened scrutiny in that segment. Though overall refinance volume remains modest, the comparatively higher risk of cash-out products may prompt tighter internal guardrails or additional verification protocols.
Meanwhile, the modest rise in economic risk — driven by forecasts of slowing home price appreciation — underscores a shifting macro environment. With home values expected to rise only in the low single digits over the coming year, professionals in secondary markets and capital strategy may want to factor in the possibility of flattening equity growth.
