The UFA Default Risk Index for the first quarter of 2014 is 114, up from the recent low of 76 four quarters ago in our baseline scenario. Under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be 14 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 of Ann Arbor, Michigan.
“The recent increase in the Index is due to the steep increase in mortgage rates in recent quarters,” 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. “Rates rose by more than 100 bps last year, making loans originated at the lower rates less likely to default, because the existing low rate mortgages are more valuable to the borrower. On the other hand, current borrowers in the present interest rate climate are faced with higher monthly payments and are slightly more likely to default than if rates had remained constant.”
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.