Mortgage Default Risks Edging Lower

The UFA Default Risk Index for Q1 of 2012 fell to 128 from Q4 of 2011's revised 129 in our baseline macro scenario. Under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 28 percent higher than the average of similar loans originated in the 1990s, due solely to the local and national economic environment. That’s a key finding of the latest UFA Mortgage Report by University Financial Associates (UFA) of Ann Arbor, Mich. “Our baseline macro scenario is based on consensus expectations and has real GDP growing at 2.5 percent for the next two years and core inflation at 1.6 percent. We believe that surprises are more likely to be on the upside than the downside of this consensus,” said Dennis Capozza, who is the Dale Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA. “Upside surprises for the macro scenario would reduce defaults relative to this baseline. Currently, record low mortgage rates and accommodative monetary policy are helping to support the housing market and reduce defaults relative to what would otherwise prevail.” The UFA Default Risk Index measures the risk of default on newly originated prime and 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.