Mortgage Default Risks Still High, But Falling
Ross Professor Dennis Capozza's default risk index at lowest level in five years.
ANN ARBOR, Mich.---Although 20 percent of U.S. mortgages are currently underwater, Americans' risk for defaulting on their home loans is going down, says a professor at the University of Michigan's Ross School of Business.
Dennis Capozza, professor of finance and real estate and the Dykema Professor of Business Administration, says that while the risk is still high, it's at its lowest point since 2005.
"Although house prices will continue to decline, the rate of decline has decelerated. The hardest-hit areas have begun to return to sustainable levels," said Capozza, founding principal of University Financial Associates (UFA), a risk-management firm that forecasts mortgage and consumer loan performance. "Slower house price depreciation will mitigate risk levels for mortgage lenders."
The UFA Default Risk Index, which measures the risk of default on newly originated prime and nonprime mortgages by tracking local and national economic conditions, has fallen to 158 for the first quarter 2010. This is down from last quarter's 164.
The index represents a comparison with the average of the 1990s (100). Thus, the worst-case risk of default on home loans is 1.58 times (or 58 percent) higher than the average of the 1990s. The peak level of 330 was set in 2007.
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