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Mortgage Defaults: Signs of Recovery

January 3, 2012 1:38 am

The UFA Default Risk Index for the fourth quarter of 2011 edged lower to 131 from the year’s third quarter revised 133, which suggests that residential mortgage default and prepayment risks are continuing their return to normalcy, according to a recent report by realestateeconomywatch.com.

According to a recent UFA Mortgage Report by University Financial Associates of Ann Arbor, Mich., the stage is set for a recovery in the housing market. Under current economic conditions, investors and lenders should expect defaults on loans currently being originated to be only 31 percent higher than the average of loans originated in the 1990s, due solely to the local and national economic environment.

The UFA Default Risk Index measures the risk of default on newly originated 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 less favorable currently 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 prime and nonprime 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.
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