The Non-Prime Mortgage Report Default Risk Index for the winter quarter of 2005 is 96 from a revised 95 in the fall of 2004. The index has risen by 25 percent since 2003, but remains moderate by historical standards. The index measures the risk of default on newly originated non-prime mortgages. That's a key finding of the latest Non-Prime Mortgage Report by University Financial Associates (UFA) of Ann Arbor, Mich.
"House price appreciation remains well above trend, but the prospects for future increases are eroding. These trends cause the default risk to be moderate," says Dennis Capozza, professor of finance at the University of Michigan and a principal in UFA.
Under current economic conditions, non-prime lenders should expect defaults on loans currently being originated to be significantly higher than the average of loans originated in 1998 to 2003, but four percent less than the average rate on mortgages originated in the 1990s. The winter 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. 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 currently less favorable than in prior years.
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 the shock. Fed easing of interest rates has the opposite effect.
For more information, visit www.ufanet.com.