University Financial Associates' (UFA) "Best Places to Lend" for Winter 2005 includes the oil-producing states of Oklahoma, New Mexico, Louisiana, Texas, North Dakota, Alaska, Mississippi and West Virginia. Six of these eight states are on the top 10 list for highest oil production per capita by state. Mississippi and West Virginia are the two states that are not in the top 10 list for oil production. "Best" places have expected loan values (profitability) for a "constant-quality" borrower that are higher than in other states. That's a key finding of the latest quarterly non-prime mortgage analysis produced by UFA. The "Best Places to Lend" list holds borrower quality constant and reflects only the variation in economic conditions among states.
"Both borrowers and the underlying housing collateral in these areas are situated more favorably to withstand the consequences of an uncertain economy," said Dr. Dennis Capozza, professor of finance at the University of Michigan Business School and a principal of UFA. "Expected defaults in the best places can be as little as half the level of some of the less promising states. Losses can vary even more, since recoveries are also enhanced when economic conditions are favorable for lenders."
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 non-prime 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 it. Federal easing of interest rates has the opposite effect.
For more information, visit www.universityfinancial.com.