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.