Risk of Mortgage Default Falls to Multi-year Low

Under current economic conditions, the risk of defaults on mortgages currently being originated is only 20 percent higher than the average of similar loans originated in the 1990s and much less than in 2006-2008 period.

Solely to the local and national economic environment, residential mortgage default risks for all vintages have been revised lower this quarter, and as a result, lenders can comfortably loosen credit for newly originated loans, according to University Financial Associates, LLC (UFA), which publishes the UFA Default Risk Index. All recent vintages have been revised lower by almost 10 index points as a result of UFA’s more sanguine house price forecast.

“The worst is clearly over so that mortgage lenders can comfortably loosen credit for newly originated loans,” said Dennis Capozza, who is the Dale Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Important factors in the more favorable outlook include low mortgage rates, the Federal Reserve’s loose monetary policy, and lower house prices now at or below fundamental values in many locations.”

Dr. Capozza said the continuing trend to more favorable conditions is encouraging lenders to be more aggressive, resulting in more financing being available for mortgage markets. He said the environment for mortgage investment is the best he has seen since before the housing crash in 2006.

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.