The UFA Default Risk Index: Waiting for slack tideMortgagePress.comUFA Default Risk Index
The UFA Default Risk Index for the summer quarter of 2005 is 78,
up from a revised 75 from the spring quarter. Since 2003, the index
has risen steadily, but remains below average by historical
standards. Although housing collateral continues to outperform
historical trends, the rising default index reflects the increasing
probability that house prices will revert and appreciate at rates
below trend.
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
nonprime 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. Fed easing of interest rates has
the opposite effect.
"House price appreciation remains well above trend, but the
prospects for future increases are eroding. These trends cause the
mortgage default risks to be moderate," says Dennis Capozza,
professor of finance at the University of Michigan and a principal
at UFA.
Under current economic conditions, mortgage lenders should
expect defaults on loans currently being originated to be
significantly higher than the average of loans originated in 1998
to 2003, but 22 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. The index measures the risk of default on newly-originated
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 less favorable
currently than in previous years.
For more information, visit www.ufanet.com.
