The mortgage market has experienced significant shifts over the past few decades, driven by changing economic conditions, market dynamics, and regulatory responses. One key area of focus has been mortgage default rates, which serve as a crucial indicator of the health and stability of the housing market. Fannie Mae’s mortgage default rates, spanning from 1999 to 2023, offer a valuable lens through which we can examine these changes. This analysis explores how lending practices, borrower characteristics, and macroeconomic factors have evolved, particularly during two critical periods: the 2007-2009 financial crisis and the post-crisis period in 2019. By examining key factors such as credit scores, loan-to-value (LTV) ratios, debt-to-income (DTI) ratios, and first-time home buyer trends, we can gain insights into the underlying drivers of mortgage default rates and the effectiveness of policy reforms aimed at improving market stability.

The time series analysis of Fannie Mae’s mortgage default rates from 1999 to 2023 reveals dramatic shifts in loan performance across different economic cycles (Figure 1). During the dot-com bubble (2000-2002), default rates remained relatively stable under 2%. However, the 2007-2009 financial crisis saw rates spike to approximately 8%, leading to significant market distress. The subsequent recovery period showed a steady decline in default rates, stabilizing below 1% by 2019. Notably, this improved performance persisted even through the COVID-19 pandemic, suggesting robust reforms in lending practices. To better understand these improvements, this analysis examines loan characteristics during two critical periods: 2007, representing peak crisis conditions, and 2019, demonstrating reformed lending practices that were subsequently tested by the pandemic.

The analysis of credit score patterns shows a marked shift in lending practices (Figure 2). The 2007 data shows a broader distribution with a significant portion of loans in the 620-680 range. Notably, loans that defaulted had significantly lower average credit scores, highlighting the importance of this metric in predicting default risk. In contrast, 2019 demonstrates a concentrated distribution in the 740-780 range, reflecting stricter credit quality requirements and improved risk assessment practices.

Examining LTV ratios reveals crucial risk patterns in lending practices (Figure 3). The 2007 data shows two concerning spikes: a major concentration at 80% LTV and another substantial peak at 90% LTV, indicating high-risk exposure. By 2019, while similar concentration points existed at these LTV levels, the magnitude of these spikes was considerably smaller, suggesting more balanced and conservative lending practices.

The relationship between DTI ratios and default rates shows significant improvement over time (Figure 4). Higher DTI ratios (>45%) in 2007 corresponded with default rates exceeding 12%. Importantly, there were many loans with DTI ratios above 51% in 2007, a level that was barely seen in 2019. The 2019 data showed default rates below 3% and a much tighter control on high DTI ratios, indicating more effective assessment of borrower repayment capacity.

Default patterns among first-time home buyers reveal an interesting trend (Figure 5). Contrary to conventional expectations, the data shows that first-time home buyers actually demonstrated lower average default rates. This counter-intuitive finding likely reflects the implementation of stricter risk assessment principles for this borrower segment, resulting in more careful screening and better loan performance. The increased proportion of first-time home buyers in 2019, combined with stricter criteria for non-first-time buyers, appears to have contributed to overall lower default rates.

The examination of loan purposes reveals varying risk levels across different loan types (Figure 6). Cash-out refinances in 2007 showed the highest default rates (>10%), while purchase loans demonstrated lower risk. By 2019, default rates across all purposes converged to below 2%, suggesting more uniform risk assessment regardless of loan purpose.

The analysis identifies significant improvements in default risk management between these two periods. The data reveals strong correlations between default rates and traditional risk metrics (credit scores, LTV, DTI), while highlighting the effectiveness of post-2008 reforms. The stability observed during COVID-19 validates the improved risk assessment framework, as evidenced by consistent performance across all loan characteristics in the 2019 data. These insights suggest that maintaining the current risk assessment framework, with its emphasis on higher credit quality, lower leverage levels, and stricter criteria for all borrower segments, is crucial for continued market stability. The success in managing risk for first-time home buyers demonstrates that tailored, stringent approaches can effectively expand home ownership while maintaining low default rates.


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Figure Appendix

Sharp spike in default rate during the 2008 financial crisis

Figure 1: Sharp spike in default rate during the 2008 financial crisis


Borrower Credit Score Comparison across defaulters vs non-defaulters (2007 vs. 2019)

Figure 2: Borrower Credit Score Comparison across defaulters vs non-defaulters (2007 vs. 2019)


Loan-to-value Ratio Distribution (2007 vs. 2019) showing higher risk profiles in 2007

Figure 3: Loan-to-value Ratio Distribution (2007 vs. 2019) showing higher risk profiles in 2007


Higher occurences of loans with >51% DTI in 2007

Figure 4: Higher occurences of loans with >51% DTI in 2007


First time home owners have lower default rates due to stricter risk principles

Figure 5: First time home owners have lower default rates due to stricter risk principles


Figure 6: Default rates stabilised to below 0.3% across all loan types in 2019