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.
