Mortgage defaults at lowest levels in five years

Dec 23, 2010

(PhysOrg.com) -- Default risk on home loans fell once again this quarter to its lowest level in more than five years, says a professor at the University of Michigan's Ross School of Business.

Dennis Capozza, professor of and and the Dykema Professor of , says that under current , investors and lenders should expect defaults on loans currently being originated to be just slightly higher than mortgage defaults in early 2005.

Capozza's UFA Default Risk Index, which measures the risk of default on newly originated prime and nonprime mortgages by tracking local and national economic conditions, registered 143 during the current quarter.

This means that homeowners are 43 percent more likely to default on their loans than the average of loans originated in the 1990s—but still much less likely than the worst years of the economic downturn from 2006 to 2008. The peak level of 362 was set in 2007.

While the index shows that default risks remain high, mortgage originators should be less apprehensive about new originations, Capozza says. Rising inflation expectations and decelerating rates of house price decline have helped spur lower default rates.

"If the Fed is successful in raising the inflation rate with a new round of quantitative easing, nominal house prices will not have to fall as far to restore equilibrium, and defaults will be mitigated," said Capozza, who is a founding principal of University Financial Associates (UFA), a risk-management firm that forecasts mortgage and consumer loan performance.

"Furthermore, we are seeing a deceleration in the decline in house prices, although this may be a temporary result due to the expiration of the federal government home-purchase subsidy program. Initial evidence is already suggesting that the surge in buying at the expiration is being reversed out."

The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime . The analysis is based on a "constant-quality" loan, which has 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.

Explore further: Economist outlines work on managing tasks and time

add to favorites email to friend print save as pdf

Related Stories

Mortgage crisis: Blame the bank?

Aug 27, 2008

(PhysOrg.com) -- Banks have played a big role in the mortgage crisis, not only because they issued loans to suspect borrowers, but because many originated and sold bad loans to other lenders, says a University of Michigan ...

Recommended for you

Economist outlines work on managing tasks and time

21 hours ago

"When a man knows he is to be hanged in a fortnight," said Samuel Johnson, "it concentrates his mind wonderfully." Most of us, spared such an imperative, carry on in a less-concentrated state, but it holds ...

Companies do not use online HRM effectively

Dec 15, 2014

Professor Tanya Bondarouk of the University of Twente thinks it's embarrassing : many companies and organizations are still not making effective use of e-HRM systems. These online systems can be used for a wide range of HRM-related ...

Happy-go-lucky CEOs score better returns

Dec 11, 2014

A CEO's natural sunny disposition can have an impact on the way the market reacts to announcements of company earnings, according to research from the University of British Columbia's Sauder School of Business.

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.