The risk of default for more recently originated mortgages is close to levels seen 10 years ago, according to the findings from the University Financial Associates(UFA) of Ann Arbor, Michigan.
In the second quarter of this year, the UFA Default Risk Index stood at 106, up from 97 in the previous quarter. A score of 106 suggests that under current conditions, investors and lenders should expect defaults on recently originated loans to be 6 percent higher than similar loans originated in the 1990s. Between 2006 and 2008, the index peaked well above 200.
“These readings on the Index are the lowest in almost 10 years, but we may not be able to declare the mortgage crisis over yet,” said Dennis Capozza, business professor at the University of Michigan and a founding principal ofUFA.
Capozza warned the current situation is not “typical” or “normal.”
“In today’s market the negative effect of high unemployment rates is being offset by very low mortgage rates and accommodative monetary policy. In most recoveries there is usually a short transitional period similar to the current situation; but it is not ‘common’ or ‘typical,’” he explained.
The UFA evaluates how economic conditions will impact defaults, prepayments, loss recoveries, and loan values on prime and nonprime loans.