Default risk moderate, says Nonprime Mortgage Reportmortgagepress.comhouse price appreciation, economic trends, loan defaults
The Nonprime Mortgage Report's Default Risk Index for the fall
quarter of 2004 is 97 from a revised 98 in the previous quarter.
The index has risen by 15 percent since 2001 and more than 25
percent since late 1998, but remains moderate by historical
standards. The index measures the risk of default on newly
originated non-prime mortgages. That's a key finding of the latest
Nonprime Mortgage Report by University Financial Association (UFA)
of Ann Arbor, Mich.
"House price appreciation remains well above trend, but the
prospects for future increases are eroding. These trends cause the
default risk to be moderate," says Dennis Capozza, professor of
finance at the University of Michigan and a principal in UFA.
Under current economic conditions, non-prime lenders should
expect defaults on loans currently being originated to be
significantly higher than the average of loans originated in 1998
to 2003, but three percent less than the average rate on mortgages
originated in the 1990s. This quarter's changes reflect the
life-of-loan impact of mortgage rates as well as revisions to the
housing data, including continuing strength in the collateral
markets.
UFA's analysis is based on a "constant quality" loan--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 currently less favorable than in
prior years.
Each quarter, UFA evaluates economic conditions in the United
States and assesses how these conditions will impact expected
future defaults, prepayments, loss recoveries and loan values for
non-prime loans. A number of factors affect the expected defaults
on a constant-quality loan. Most important are worsening economic
conditions. A recession causes an erosion of both borrower and
collateral performance. Borrowers are more likely to be subjected
to a financial shock such as unemployment and, if shocked, will be
less able to withstand the shock. The Fed's easing of interest
rates has the opposite effect.
The Nonprime Mortgage Report is a unique analysis that has
successfully predicted such development as the increased defaults
in southern California in the mid-90s. Its predictions are based on
an extensive analysis of local economic conditions in each state
and the relationship of those conditions to loan profitability. The
historical record of millions of mortgage loans is studied each
quarter to assess the vulnerability of each state to loan losses
and prepayments. The detailed analysis of each state--including
best and worst places to lend--appears in the Nonprime Mortgage
Report, which is published quarterly by UFA.
For more information, visit www.ufanet.com.
