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Freddie Mac report: Refi borrowers choose the safety of fixed-rate mortgages in Q3 of 2008

National Mortgage Professional
Nov 19, 2008

UFA Default Risk Index: Light at the end of the tunnel or severe recession?MortgagePress.comUniversity Financial Associates, recession, UFA Mortgage Report, University Financial Associates, Ross School of Business The University Financial Associates (UFA) Default Risk Index for the fourth quarter of 2008 fell to 148 from last quarter's revised 167 based on most recent data. The decline is a welcome respite from the rising trend that has prevailed for the last five years; however one caveat is needed. A severe recession next year is becoming more likely every day. If a severe recession is realized, we estimate that the UFA Default Risk Index for the current vintage of loans would be 5-10 points higher. Under current economic conditions, nonprime investors and lenders should expect defaults on loans currently being originated to be 48 percent higher than the average of loans originated in the 1990s. That's a key finding of the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Mich. "Currently, 20 percent of homeowners are estimated to have negative equity in their homes. This figure is sure to rise, since UFA forecasts additional home price declines in many states," says Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA. "If a severe recession develops as some macroeconomic forecasters expect, job losses and unemployment will rise and will exacerbate mortgage defaults as borrowers find yet another reason to walk away from their indebtedness." The UFA Default Risk Index measures the risk of default on newly originated nonprime 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 much less favorable currently than in prior years. For more information, visit www.ufanet.com/nmr.htm.
Published
Nov 19, 2008
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