Risk of Mortgage Default Rises 58 Percent Higher than in 1990s

Written by: Steve Cook   Thu, March 4, 2010 Beyond Today's News, Crisis Watch

Lenders and investors can expect defaults on loans currently being originated today to be 58 percent higher than the average of the 1990, according to the latest University Financial Associates (UFA) Mortgage Report.

The UFA Default Risk Index for the first quarter of 2010 fell to 158 from last quarter’s revised 164, and has now fallen by more than half from the peak level of 330 set in 2007.

Despite the index’s recent steep decline, the risk of default for the current vintage of mortgages remains elevated. The rate of house price depreciation has decelerated, and the hardest-hit areas have begun to return to sustainable levels.  Slower house price depreciation will mitigate risks for mortgage lenders. The Index illustrates the important role that local economic conditions, such as house prices, have played in this credit cycle since loan, borrower and collateral characteristics are held constant over time in the Index.

“Although UFA forecasts that house prices will continue to decline, the rate of decline has decelerated. The hardest-hit areas have begun to return to sustainable levels,” said Dennis Capozza, who is the Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Slower house price depreciation will mitigate risk levels for mortgage lenders.”

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years

Leave a Reply