Mortgage Defaults Continue to Decline Nationally
New research from Dennis Capozza shows that the risk of default on home loans is half the peak level reached three years ago.
ANN ARBOR, Mich. — While the risk of default on home loans remains high, it's about half of the peak level reached three years ago, says a professor at the University of Michigan's Ross School of Business.
Dennis Capozza, the Dykema Professor of Business Administration, says that under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 84 percent higher than the average of loans originated in the 1990s — but much less than the worst years of the economic downturn (2006-08).
Capozza's UFA Default Risk Index, which measures the risk of default on newly originated prime and nonprime mortgages by tracking local and national economic conditions, registered 184 during the third quarter 2010. The peak level of 362 was set in 2007.
"While default risks remain elevated, mortgage originators need not be as apprehensive about new originations," said Capozza, professor of finance and real estate at Ross and a founding principal of University Financial Associates (UFA), a risk-management firm that forecasts mortgage and consumer loan performance.
The index represents a comparison with the average of the 1990s (100). Thus, the worst-case risk of default on home loans is 1.84 times (or 84 percent) higher than the average of the 1990s.
The UFA Default Risk Index 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.
"The index is slowly returning to pre-crisis levels, but may need another five years to complete the trek," Capozza said."A macroeconomic detour into deflation would lengthen the journey."
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